The main objective of the project is to study the ripple effect of the sub prime mortgage crisis in US and its impact on Indian service industry. The paper includes a study on sub prime, causes for the sub prime mortgage crisis, effect of the crisis on the American economy accompanied by an illustration. Its affect on inflation will also be examined just before looking at the affect on the Indian service industry. The main sources of information for the project are the secondary source like business magazines, newspapers and websites. Another thing that will be examined is the ripple effect that the crisis had which included situations like increased government debts, downward pressure on dollar leading to inflation, etc.
[...] The Reserve Bank of India, in its latest progress report on banking in India, noted that some Indian banks with overseas operations do have some exposure to credit derivatives and there could be some losses due to mark- to-market impact. However, it said such exposure was "very limited" and that banks did not have any direct exposure to the US subprime market, it said. The main variants of credit derivatives include collateralized debt obligations and credit default swaps. CDOs are securities backed by pools of other securities and bought by investors wanting exposure to the income from a set of loans or bonds but not direct exposure to them. [...]
[...] Sub prime credit cards: Credit card companies in the United States began offering subprime credit cards to borrowers with low credit scores and a history of defaults or bankruptcy in the 1990s when usury laws were relaxed. These cards usually begin with low credit limits and usually carry extremely high fees and interest rates as high as 30% or more. In 2007, many new subprime credit cards began to sprout forth in the market. As more vendors emerged, the market became more competitive, forcing issuers to make the cards more attractive to consumers. [...]
[...] Impact on Dollar: The Fed is cutting Interest rates to bolster the slumping economy and keep the credit crunch from getting worse. But in the process dollar getting week with major currencies it creating other problems including the potential for higher inflation. A weak dollar tends to boost oil and other commodity prices and makes imports more expensive for Americans. Reducing Dollar reserves by countries is also adding fuel to depreciate dollar further. This making dollar on downward pressure on dollar. [...]
[...] The subprime mortgage industry collapses, and a surge of foreclosure activity and rising interest rates threaten to depress prices further as problems in the subprime markets spread to the near-prime and prime mortgage markets. This makes homeowners can no longer afford the mortgage payment once the interest rate increases to market rate or if the homeowner loses his job. Consequently, such mortgages have a relatively high rate of default and that rate is increasing. Effect on financial institution. Many banks, mortgage lenders, real estate investment trusts (REIT), and hedge funds suffered significant losses as a result of mortgage payment defaults or mortgage asset devaluation. [...]
[...] However, it added that if the impact of the subprime crisis expands to other financial services, there could be a short-term impact on order bookings for companies with a high BFSI exposure. With all large-cap companies clarifying that the exposure to the subprime segment is minimal less than 1 per cent of revenues we do not see any material impact on earnings or visibility. In the medium-term , a sharp US global slowdown could result in medium-term pressures due to freezing of IT budgets for the short term, leading to quarterly volatility for Indian IT services players. [...]
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