double the leverage they were allowed to keep on their balance sheets, i.e. to lower their capital adequacy requirements.
* The Meltdown
Initially started as a liquidity problem, it soon precipitated into a solvency problem, making US financial institutions search for capital that was not readily available. Bear Stearns was sold to the commercial bank J.P. Morgan Chase in mid-March 2008; Lehman Bros filed for bankruptcy in mid-September 2008; Merrill Lynch was sold to another commercial bank, Bank of America and finally Morgan Stanley and Goldman Sachs signed a letter of intent with US Federal Reserve on September 22, 2008 to convert themselves.
* Impact of the Economic Crisis on India
With the increasing integration of the Indian economy and its financial markets with rest of the world, there were downside risks from these international developments. These included:
- Capital Outflow
The main impact of the global financial turmoil in India has emanated from the significant change experienced in the capital account in 2008-09, relative to the previous year. Total net capital flows fell from US$17.3 billion in April-June 2007 to US$13.2 billion in April-June 2008.
-Impact on Stock and Forex Market
With the volatility in portfolio flows having been large during 2007 and 2008, the impact of global financial turmoil was been felt particularly in the equity market. Indian stock prices were severely affected by foreign institutional investors' (FIIs') withdrawals. FIIs had invested over Rs 10,00,000 crore between January 2006 and January 2008, driving the Sensex 20,000 over the period. But from January, 2008 to January, 2009 this year, FIIs pulled out from the equity market partly as a flight to safety and partly to meet their redemption obligations at home. These withdrawals drove the Sensex down from over 20,000 to less than 9,000 in a year.
- Impact on the Indian Banking System
One of the key features of the current financial turmoil had been the lack of perceived contagion being felt by banking systems in emerging economies, particularly in Asia. The Indian banking system also had not experienced any contagion, similar to its peers in the rest of Asia. The Indian banking system was not directly exposed