Once investments in the US turned bad, more money had to be invested in the US, to maintain that fixed proportion.
In order to invest more money in the US, money had to come in from somewhere. To make up their losses in the sub-prime market in the United States, they went out to sell their investments in emerging markets like India where their investments have been doing well.
So these big institutional investors, to make good of their losses in the sub-prime market, began to sell their investments in India and other markets around the world. Since the amount of selling in the market is much higher than the amount of buying, the Sensex began to tumble.
The flight of capital from the Indian markets also led to a fall in the value of the rupee against the US dollar.
Image: A deserted play ground in front of a newly built and nearly empty apartment building in Sesena near Madrid, Spain. The downturn of the Spanish housing market has turned the place into a ghost town. | Photograph: Jasper Juinen/Getty Images
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