THE massive shake-out on Wall Street last week had its immediate impact on India, with stock market indices tumbling and the rupee haemorrhaging.

But within days of the collapse of investment bank Lehman Brothers, the bail-out by the US government of insurance giant AIG (for $85 billion) and the acquisition of a third beleaguered player, Merrill Lynch, by Bank of America, the markets stabilised here.

Finance Minister P. Chidam-baram’s assurance that Indian banks and insurance companies were virtually untouched by the hurricane that swept through the American financial markets restored the confidence of the markets.

All three humbled firms — Lehman Brothers, Merrill Lynch and AIG — have a significant presence in India. The two investment banks have also been major recruiters of graduates from India’s top B-school — including the Indian Institute of Management and the Indian School of Business — offering them million-dollar annual compensation packages and deputing them to London, New York, Hong Kong and Singapore.

New York and London-based investment banks have been hiring nearly a third of the graduates from the elite IIMs (especially those located at Ahmedabad, Bangalore and Kolkata) and the ISB, Hyderabad, in recent years.

Both Lehman Brothers and Merrill Lynch have also been investing large sums in fast growing sectors of the Indian economy, including real estate and infrastructure. But the bankruptcy proceedings in America are unlikely to have any significant impact in India.

“Let me assure everyone there is no cause for alarm,” says Chidambaram. “Indian banks are not being exposed or vulnerable like a couple of banks that have failed in the US. All our financial institutions are on a sound foundation.” His announcement led to a sharp recovery in the markets.

A confident Chidambaram asserts that “all our banks have strong balance sheets. The industry is well regulated, and all banks have made full disclosure to the Reserve Bank of India.” The regulators — Reserve Bank, the country’s central bank, and the Insurance Regulatory Development Authority of India — have assured the government that the Indian financial services sector would not be adversely affected by the crisis rocking USA.

The Tatas, who are majority partners (with a 74 per cent stake) in two insurance joint ventures with AIG — one a life insurance firm and the other non-life insurance — have also told the government that they would be able to meet all obligations of the joint venture.

The government will take all measures to ensure adequate liquidity in the market, says the finance minister. The RBI has decided to increase funding to banks to help them tackle any liquidity problems. The central bank, which manages foreign exchange reserves of nearly $300 billion, would also intervene in the markets to meet the requirements for hard currency.

Foreign institutional investors (FIIs) have been dumping shares on the stock markets and repatriating funds in huge numbers, ever since the sub-prime mortgage crisis broke out in the US. They have pulled out $8 billion from India in recent months, of which over a billion dollars have been in recent days, hurting stock market sentiments and impacting the rupee.

The rupee plunged to a record low of 46.99 to the dollar last week; it has already fallen by 10 per cent since the beginning of August. But assurances from Chidambaram and the intervention by the RBI led to a recovery. The central bank has also increased the cap on interest rates that banks can offer non-resident Indians and others for foreign currency deposits. *****

INDIA’S state-owned banks have virtually no exposure to Lehman Brothers. But ICICI Bank, the country’s largest private sector bank — and the second-largest commercial bank — has a marginal exposure.

ICICI Bank holds $80 million worth of senior bonds issued by the bankrupt firm, which has led it to raise its provisioning by $28 million. The bank has total assets of over $100 billion and the $28 million provisioning is unlikely to hurt it much.

A broking unit of Lehman Brothers, which is also a trading-cum-clearing member of the Bombay Stock Exchange, also did not have any outstanding position or settlement obligations. The fourth-largest — and oldest — American investment bank has over the years been expanding its presence in India.

Besides its brokerage business, it has a thriving business process outsourcing (BPO) unit. It also operates a non-banking finance company (NBFC), Lehman Brothers Capital, and has a primary dealership, Lehman Brothers Fixed Income Securities. The RBI has imposed curbs on all its outfits in India, preventing them from remitting funds abroad.

Lehman Brothers Investment Management, which was registered with the Securities and Exchange Board of India (SEBI), the capital market watchdog, as an FII, had made investments in several Indian companies. Its total holdings amounted to over $100 million.

After the American investment bank filed for bankruptcy in the US, the market capitalisation of the companies in which it had a stake fell by over $430 million. But Lehman has been dumping shares in a big way over the past few weeks, so the damage was limited. One of its most significant investments was in Edelweiss Capital Finance, an Indian NBFC.

But there are enough suitors for Lehman Brothers India operations. Barclays, which has acquired Lehman’s North American operations for a measly $1.75 billion, is also believed to be keen on acquiring its investment banking and brokerage businesses in India.

Another European bank that is waiting in the wings is BNP Paribas. Both these banks are eager to expand in the investment banking and securities trading business in India. The beleaguered firm has total assets adding up to over $500 million in India. Last year, it invested almost $400 million in two Delhi-based real estate firms, DLF and Unitech.

The American investment bank has a staff of nearly 2,500 in India. Head hunters have now started making lucrative offers to top executives of the company, and even the mid-level and junior staff is expected to be absorbed in the Indian financial services and BPO industries, both of which are facing a massive shortage of personnel.

*****

OBSERVERS here believe that Indian banks and financial players have not taken any big hits in the recent crisis because of the conservative approach of domestic regulators.

For instance, the IRDA, the insurance regulator, has imposed tough norms for the industry; the solvency margin is 150 per cent. All the players stick to these norms. In fact, according to Tata AIG Life, “Our local solvency margin as at the end of August 2008 stood at over 300 per cent compared to the regulatory minimum of 150 per cent.”

Kamal Nath, India’s Commerce and Industry Minister, who has had a tough battle with US negotiators in the World Trade Organisation — Doha round talks — recently, takes a dig at the developed world. “Those who preached us about best practices have not helped their own financial sector,” he remarks. “The US financial system is facing deep crisis and this is obviously going to impact Europe. The US will have to ensure that their financial system comes again in the same orbit as the economy.”

But the Wall Street woes are unlikely to slow down the pace of economic reforms in the country. Chidambaram claims that reforms will continue as before. He is confident that the Indian economy, which has seen a slowdown in the growth rate, will expand at over eight per cent this fiscal. In the first quarter of the current fiscal (April-June), gross domestic product (GDP) grew by 7.9 per cent, according to the Central Statistical Organisation.

The RBI believes the economy will grow at 8- 8.5 per cent. A good south-west monsoon will see accelerated growth in the farm sector. The industrial sector grew by 6.9 per cent in the fist quarter, while services expanded by 10 per cent.

The private sector is expected to invest about $40 billion in new projects in the current fiscal, estimates the RBI.