Call it a crisis of confidence. Just when everyone thought that the fast-growing Indian economy has decoupled itself from the disturbances in the developed world, new developments in the United States have sent shivers in the Indian stock markets. All stock indices in the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have taken a severe beating. The nervousness started about a week ago when on every trading day the benchmark indices BSE Sensex and NSE Nifty lost ground. The worst crash happened on Monday when the Sensex lost 1400 points and the Nifty lost close to 500 points. The sharp fall in the Indian market, as well as in the other leading markets in the world, was a direct consequence of the deepening subprime crisis in the USA, a financial disaster created by over-ambitious finance companies.

The subprime crisis or the mortgage crisis is actually the result of a financial engineering, considered to be an innovative move earlier, where borrowers with lower creditworthiness were given generous loans by banks at a rate of interest higher than the prime rates. These loan portfolios were sold again to other investors like private equity funds, hedge funds and non-banking finance companies through securitisation. With the risk taken off from the bank’s portfolio, they lent again and again to the subprime borrowers. The balloon filled with hot air of bad loans became bigger and bigger. But the artificial boom created with easy money went bust when property prices in the US crashed and borrowers started defaulting. Experts now believe that the total loss from the subprime crisis will be upwards of $150 billion, much more than the initial estimates of around $ 95 billion.

In order to swim against the crisis, the US federal Reserve has already cut interest rates twice and is expected to lower it once again. But the “sinking feeling” has gone so deep in the minds of the US investors that they are not hopeful of any revival in the near future. Taking a cue from US nervousness investors in leading stock markets in the world are on a selling spree. The most important lesson to learn from this crisis is that no matter how strong our economy is, stock markets will be influenced by global developments even if it is as absurd as subprime lending in the US. Another take from this crisis is that the world famous credit rating agencies, the so-called whistle blowers of financial risks, failed miserably to anticipate the magnitude of the financial crisis.