In the business world, the much talked about term, the sub-prime effect, has actually created a financial ripple into third world economies. World-wide, economists are working day and night to propound a new business theory that could explain the dilemma of the sub-prime effect. Logically, property and gold are inversely related and so is the stock market to the property. But we all have seen an unprecedented growth in all the sectors without any proven prudence behind them. Stocks in India have shown fare amount of correction after the global news of the sub-prime effect on U.S. housing sector, but gold and property are still at an all-time high.
After a greener pasture from 2000 to 2005 in the housing sector boom, the U.S. leaped towards a false growth in the shape of huge financial bubble (the sub-prime effect) from the end of 2005 to the end of 2006, which ultimately busted. It all started when the sub-prime mortgage loans started defaulting in huge numbers. Although the inherent risk of sub-prime mortgage was known to the lenders, the premium charged for cover up was not enough to balance the defaulting amounts. In the times to come, a double whammy is about to hit the home-loan borrowers as the interest rates will start climbing up and paying higher installments will become difficult with every passing day. No one at this juncture will prefer refinancing as an option since the real-estate prices will be falling.
The news of sub-prime effect spread like jungle fire and it was absolute surrender around the globe by the financial markets. Soon all were in red and a huge cash crunch led to further slowing down of the world economy, which is normally driven by dollar. Once the dollar evaporated from the world market, the demand supply equations left the economies shattered world over. Economies that were insulated from the sub-prime effect to some extent were largely the ones that had the capacity to survive on their own, due to the huge internal demands.
Obviously one can not blame U.S. for such a fiasco since we all are operating in an open structured world; although the fact remains that U.S. alone contribute nearly 25 percent of global transactions in all. Keeping the involvement of the U.S. in the world trade, one can easily fathom the crucial link that the U.S. provides to the global trade. On the onset of this tragic financial era, the economies, which were largely dependent on the dollar, faced major heat. Pursuant to the same, central banks across the world acted swiftly and pumped huge amount of dollars into the banking system to forestall a credit crunch, otherwise damage to economic growth was inevitable. In many economies, hedge funds were under check since they work on borrowed money.
Indian stock markets were also not completely insulated from the sub-prime effect that saw the net sold over Rs. 3,000 crore in one day by the FII. Negative sentiments prevailed over the Indian markets and major corrections were also seen in the following days, but still the effect of sub-prime has not evaporated completely. Shall we say that when America sneezes, India catches cold? No, this picture is not completely true.
Growth into the developing countries has been endorsed by the World Bank in its recent report. Instead, India is one of the fastest growing economies in the present world, having huge internal demand to sustain the economic growth in a self-reliant manner. The Indian economy is achieving 8 to 9 percent growth every year at a time when the sub-prime effect have some effect on every country in the world. Though there is no denial of the fact that the slow down is seen across almost all sectors in India due to FII’s withdrawals in very huge chunks, Indian economy has still shown some level of resistance .
At times, for the destination India, surplus funds from the oil economy and the pension funds were available in good number from the U.S., European countries, and from the other part of the world. To invest such large funds, suitability was traced down to China and India without caring for their political stability and other factors. Such investments started showing results in stock prices and prices of real estate were jacked up beyond comfort level. Unfortunately, now the time has come when need to invest capital back in the U.S. due to sub-prime effect. Now the question is whether to stay invested in India, where the return is higher as compared to other part of the world, or succumb to the pressure, which has been generated by the sub-prime effect.