A Joint Venture of Bank Of India & The Bombay Stock Exchange Ltd.

BOI SHAREHOLDING LTD. Manages Clearing House of Bombay Stock Exchange

(BSE) since 1989. A joint venture between Bank of India & BSE. Board consists 8 members – 4 each from BOI & BSE,

Chairman & Managing Director of BOI is Chairman of

the Company.

Functions: Clearing & Settlement Collateral Management for the Exchange. Depository Services under CDSL & NSDL Depository. Franking & Collection of stamp Duty in the State of

Maharashtra.

GENESIS OF GLOBAL

FINANCIAL CRISIS

Monetary Policy in the US and other Western Countries were eased aggressively after dot com bubble. Policy rates in the US reached 1% in June 2003.The monetary excess during 2002-06 leading to Housing Boom. Assets prices recorded strong gains. Demand constantly exceeded domestic output. This mirrored in large growing Current Account deficit over the period.

China/East Asian Countries exporting to USA at low cost leading to growing surplus.

Creations of huge Forex Reserves at EMEs.

The Forex Reserves deployed back in US Treasuries.

This flood of dollar resulted in sharp rise in US spending.

Large Global imbalance due to very low interest rate and accommodative monetary policy.

Projected global growth in April 2008 at 3.8% down to contract by 1.3%.

Major advance economies are in recession.

Global trade volume to contract by 11%

Indicator

2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 20091. Global Growth 3.7 3.8 4.1 3.9 3.9 3 3.4 0.5 3.4 0.5 3.2 -1.3(a)  Advanced Economies 1.3 1.3 1.7 1.4 1.5 0.5 1 -2 1 -2 0.9 -3.8

(b) EMEs 6.7 6.6 6.9 6.7 6.9 6.1 6.3 3.3 6.3 3.3 6.1 1.62. World Trade Volume 3.7 3.8 4.1 3.9 3.9 3 4.1 -2.8 4.1 -2.8 3.3 -11

   Table 2: Global Economic Outlook for 2009 (per cent)

Month of Forecast

Apr-08 Jul-08 Oct-08 Nov-08 Jan-09 Apr-09

COMPONENT OF CRISIS Crisis roots in USA. Sustain rise in Asset prices, lax lending standards in 2002-06. Low credit quality. Originate Distribute model. Strong growth in complex credit

derivatives. Predominately Sub-Prime mortgages sold to financial investors. Inflation in USA started to rise in 2004 – so rise in interest rate. Housing prices depressed. With low/negligible margin; prime-

borrower encouraged to default.

US regulatory failure, multiplicity of regulators, well over 100 at the federal and state level.Role of rating agencies.Default by such borrowing led to losses by financial institution.

Wiping of significant portion of capital of Banks.

Mounted losses and dwindling net worth led to breakdown of trust among banks.

Inter-bank money market nearly frozen.

Failure of Lehman Brothers in September 2008.

Complete loss of confidence.

Deep and lingering crisis in global financial market.

Implications for Emerging Market Economy

Beginning 2003 low interest regime in USA, flight of capital to EMEs.

Average flow of USD 285 Billion during 2003-2007.

Peak of USD 617 Billing in 2007.

Estimated outflow of USD 190 billion in 2008-09.

Portfolio and private flows were volatile.

Substantial accumulation of large forex reserves with EMEs.

Constant volatility in capital flows impinges on Exchange rate movements.

Excess Foreign Exchange reserves necessitates sterilisation and more active monetary policy.

Excess capital flows results boom in Capital Market and high domestic credit and other assets prices.

Abrupt reversal in capital flows leads to significant difficulties in economy.

In current financial crisis reversal of capital flow are quick, leading to contraction of Bank Credit and collapsed stock prices.

This further leads to banking and currency crisis, employment and output losses.

IMPACT ON INDIA A . Impact of sub-prime crisis.

As initial impact of sub – prime crisis, followed by cuts in US fed fund rates, resulted in massive jump in net capital in flow.

RBI sterlize liquidity by increase in cash reserve rates and through market Stablisation scheme (MSS)

Policy rates were also raised India has limited exposure on complex derivations. Lower presence of foreign banks also minimised direct

impact.

B. Fiscal Impact

Govt. did higher expenditure on account of higher crude price, subsidies, debt waiver scheme in 2008-09.

Fiscal deficit doubled from 2.7% of GDP in 2007-08 to 6% in 2008-09.

Net Market borrowing trebled from Rs. 130 billion to Rs. 329.65 billion.

Standard is Poor downgraded its outlook on long term sovereign rating from stable to negative

C. Impact on Real Economy

Slowdown in external demand, reversal of capital flow, growth in Industrial production decelerated to 2.8% in 2008-09 from 8% previous year.

Service sector remained largely in effected with growth of 9.7% in 2008-09 as against 10.5% in previous year.

Real GDP growth slowed down to 6.7% in 2008-09 as against 9%.

Rupee dollar rate under pressure. Rupee depreciated.

Slowdown in Exports.

Reduced credit take off.

Impact on Capital Market

Index Movement in last one year

Impact on Exchange Rates

Impact on yield on 10 years Government Bond

ACTION BY CENTRAL BANK

Cash Reserve Ratio brought down to 5% in January 2009 from 9% (September 2008) injecting Rs. 1600 billion is primary liquidity.

Statutory liquidity ratios brought down, opening of refinance windows, refines to SIDBI and EXIM banks

Repo and Reverse Repo rates are cut down from 9% to 4.75% and 6% to 3.25% respectively.

MSS operations were reversed Balance Rs. 860 billion end March 2009 against Rs. 1754 billion at May 2007.

Various monitory and liquid measures released liquidity of Rs. 4900 Billion since mid September 2008 (about 9% GDP)

Banks were advised to step up lending to core sectors. Banks were advised to bring down BPLR. Restriction on interest rate to bulk deposits. Restrictions loosened on External commercial borrowing

by corporates.

Full but gradual opening of current account.

Foreign investment flows are encouraged.

External commercial borrowing is subject to ceiling and end – use restrictions.

Macro ceiling stipulated on portfolio investment in Govt. Securities and Corporate Bonds by FIIs.

Imposition of prudential limits on Banks, such as inter-bank liabilities, borrowing and lending, money market, assets - liability Management for both on and off balance sheet terms.

STRENGTH OF INDIAN FINANCIAL SECTOR

Implementation of Based II ……. Minimum 9% CRAR.

CRAR of all scheduled commercial banks at 13% at end March 2008.

Single factor stress tests reveal that Banks can withstand shocks on account of change in credit quality, interest rates and liquidity conditions.

Strict prudential norms towards income recognition, Asset classifications and provisions by the Banks.

WHY THE INDIAN FINANCIAL SECTOR

WEATHERED THE STORM

Negligible direct exposure to toxic assets which contaminated Western Banking System.

Banks credit quality remained high.

Credit Growth apx. 30% during 2004-07.

RBI tightened prudential norms CRR at 13% at March 2008 end against regulatory requirement of 9%.

Net NPA at 1% of net advance and 0.6% of assets.

LESSONS

Central Bank should adopt a broader macro-prudential views of asset price movements, credit boom and the build up of systematic risk.

Asset price bubble leads to strong credit growth such as real estate and stock market.

Only substantial hike in policy rates can pick the bubble. Pre-emptive action like hike in risk weights and provision

norms for Banks.

Sharper focus on liquidity risk management, risk transmission.

Global imbalances are to be reduced to a manageable proportion.

US needs to save more & export more.

Asian Countries have to consume more, export less.

STABILITY BEYOND EXPECTATIONS.

INDIA GENERAL ELECTION MAY 2009.

PRE-POLL CRITICAL ISSUES

Global Financial crisis.

Rajor-thin majority Government.

Melt down in Capital Market. Sensex touching a low of 8160 in April 2009, down from a peak of 20728, a fall of 61%.

Weakening economy. Rising job losses in export sector.

General Election in May 2009. Political Uncertainty

Formation of 4 front – UPA led by Congress, NDA led by BJP, Third Front – led by Left Parties.

No coalition likely to get majority

INDIAN ELECTIONS 2009

India, world’s 7th largest Country. Area 3.2 million sq.km. Population more than 10.1 billion. Religion – Hindu – 80.5%, Muslim – 13.4% (3rd largest) Estimated voters 714 million. Election duration – 1 months in 5 phases – 16 April to 13 th May

2009. Number of polling stations 687402 Number of Seats – 543 National parties 9 Regional parties 24

PRE – POLL MARKET SENTIMENTS Either UPA or NDA form the Government. Both are

seen market friendly. Market on upward swings since chances of Left

Parties (3rd Front) were remote. Market may show higher volatility if there is a

fractured verdict. Sensex rises 300 points on the eve of election.

ELECTION RESULTS 2004 - 2009YEAR 2004 2009UPA 220 262NDA 185 157OTHERS 137 17III FRONT -- 80IV FRONT -- 27TOTAL 542 543

Major News Paper Headlines / Views Finally a free hand Decisive vote for growth. The Indian economy is set to maintain its growth. Stable Government to put the confidence laid to all time

high. A strong Government, influence of the Left Parties

disappeared. With clear mandate there is a certainty in terms of

policies.

POST – POLL MARKET

SENTIMENTS

The Congress will have the last word in issues of

Government . Smooth transition of Government. Economy will be the main priority of the Government. Congress is a pre reform party. The Congress will unlock long awaited reforms.

STABILITY - KEY AGENTS

Strong United Progressive Alliance (UPA) led government allows continuity in policies.

Smooth transition – this is more like an extension of UPA’s term. IN the event of any other party / alliance coming to power, it would have taken some time for the new government to formulate its policies.

UPA to continue with its policies with more power in hand now, no fear of strange coalitions or drag of the communist parties anymore.

Economic reforms may speed up. FDI inflows into the country over the next 6-12 months can improve as India gets to play a larger role in G20.

Government is likely to continue to boost credit to support growth.

Rural focus and reforms to speed up. Disinvestments – Pressure on fiscal position will push the

government for disinvestments, though moves are unlikely to be very aggressive.

Infrastructure – Focus on low-cost housing and power generation.

Focus on rural populace: Improve access to rural credit at lower interest rates;

Subsidise food for poor; implementation of NREGA; develop rural infrastructure.

Marching of reforms in financial sector in particular banking and insurance.

ACTION AT DALAL STREET

May 15, 2009 - Previous Day Sensex at 12173. May 18, 2009 -Market opened at 9.55 A.M. at 15% high Circuit Breaker applied. Trading halted to 1 hour. Market re-opened at 11.55 A.M. at 20% high. Circuit Breaker applied. Market Closed for the day. Sensex closed at 14284.

Sensex For The Month May 2009

0.00

2000.00

4000.00

6000.00

8000.00

10000.00

12000.00

14000.00

16000.00

Sen

sex

18/05/09

15/05/09

(14296)

(12173)

There Were five days in which Circuit breaker had been applied by the exchanges in the history.

The upper circuit filter was placed only once i.e on 18th may 2009.

Market Wide circuit Breaker in the

Indian Stock Market

Trade Date High Low Close

P revious Close % Change

17-May-04 5020.89 4227.5 4505.16 5069.87 -16.62

22-May-06 11142.9 9826.91 10481.77 10938.61 -10.16

17-Oct-07 18841.29 17307.9 18715.82 19051.86 -9.15

22-J an-08 17068.57 15332.42 16729.94 17605.35 -12.91

18-May-09 14284.21 13479.39 14284.21 12173.42 17.34

Table V – Incidence of Market Wide Circuit Breaker In Indian Stock Market

16884.09 -2272.93

OpeningP oints (Increase

5020.89 -842.37

13479.39 2110.79

11071.63 -1111.7

18037.9 -1743.96

Trade Date

Market Wide Circuit Breaker

Reason

17-May-04 10% MWCB applied at about 10:15, trading halted for 1 hour. On resumption of market after one hour at about 11:15, MWCB triggered on 15% circuit and trading halted for another 2 hours. 

BJP government lost power

22-May-06 10% MWCB applied at 11:56, trading halted for 1 hour. 

Confusion regarding tax circular.

Trade Date

Market Wide Circuit Breaker

Reason

17-Oct-07 MWCB applied at 9:56, trading halted for 1 hour.

Restrictions on Participatory notes

22-Jan-08 MWCB applied at 9:56, trading halted for 1 hour.

Financial crisis (realty melt down)

18-May-09 MWCB applied at 9:55 (opening index) on a day for 2 hours (15%), subsequent to election result in favour of Congress government.market re-opened at 11:55 and MWCB applied for 20%, market halted for rest of the day

General Election Result in favour of  UPA

THANK YOU