The immediate effect of sub prime lending was crashing of the sensex lead by selling off by the FII . Why did the FII indulge in selling spree? Due to the meltdown in the US market , the FII had no option but to sell off in order to have fresh liqudity. Not only this the selling off by FII also led to depreciation in the appreciating rupee , hence, it has been called as a blessing in disguise for the exporters. The global liquidity has mad the investors risk averse so the risk appetite has reduced.
Although the sell off by FII led to downward movement in the stock market , the domestic investor considered it an opportunity and bought the stocks(as the share prices had gone down) therefore the sensex did not drop to a very large extent thankfully due to domestic buyers opportunism .
Talking of the long term impact on the sensex it will be premature to really predict the direction but one thing is for sure India is one of the best bets as it has also been said bye Lehman Bro "India is the best EM" . So rather than sitting on your money people should be invested in Indian market . Will that to overflow of capital in India ?
Let us wait & watch.
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