Widening financial problems in the United States and other European markets has affected even the most basic financial intermediation, with US authorities currently making great efforts to restore fully functioning markets. The changing international financial scenario has limited direct effect on India. But the implications global financial problems and exchange rate destabilization could result in a moderation of our exports. Moreover, heightened risk aversion could also impact pricing of assets. Indian banks do not have any direct exposure to sub-prime mortgages. The banking sector, through its overseas branches, has some exposure to distressed financial instruments and troubled financial institutions. The fundamentals of the Indian economy have been strong and continue to be strong. Our forex and money markets have been functioning in an orderly mannerBeing largely a domestic economy with exports including software at 17% of GDP, India is relatively insulated in comparison with most other economies.
While the impact on growth and exports can be quantified, the impact on currency and capital flows is not as clear. The reason is that despite India being a domestic-driven economy with strong macro fundamentals, in times of an increase in risk aversion, countries with twin deficits, inflation and political challenges tend to be viewed with caution. Possible measures include (1) further relaxation of norms on the capital account, both NRI and ECB guidelines, (2) a likely cut in the SLR given the continued buoyancy in both credit and deposits and consequent demand for government securities to meet statutory requirements, (3) possible relaxation of interest rates to pump more liquidity to the economy and (5) creating more economic confidence by careful implementation of strong fiscal policies.
This is not the time to panic. As we know our fundamentals are very strong and we do have a very good public sector as a backbone. Nervous Indian investors joined a global selloff with weak industrial output adding to the overall gloom. As a result, stocks crashed, with the Bombay Stock Exchange Sensitive Index recording its worst week in almost 18 years, reflecting an Asia-wide slide in stock prices. At the same time one should make use of the situation by procuring cheap shares of good companies right now.
The Reserve Bank of India's dramatic decision to by a further percentage point to 7.5 per cent had some soothing effect for a while when the index pared nearly half the early morning losses of over 1,000 points. This is the single-biggest cut since 2001. This measure could pump atleast Rs/- 25000 crores in to the economy and which will improves the liquidity situation of the country. But that clearly was not enough to allay fears that the deepening credit crisis will push the global economy into recession. The rupee, meanwhile, fell to a lifetime low of 49.26 against the dollar before recovering to close at 48.47. The rupee fell as foreign institutional investors pulled out money from stock markets amid the global financial turmoil. It recovered again due to RBI intervention and sale of the US currency by local banks. There could be a domestic liquidity problem if foreign institutional investors flee en masse and want to take out dollars in exchange for rupees, but the market stabilization bonds that the RBI had issued can be bought back in order to pump rupees into the system. In addition, the fact that India's banks are so well-capitalized, in comparison with both American and European banks, imparts its own stability to the system.....
While the impact on growth and exports can be quantified, the impact on currency and capital flows is not as clear. The reason is that despite India being a domestic-driven economy with strong macro fundamentals, in times of an increase in risk aversion, countries with twin deficits, inflation and political challenges tend to be viewed with caution. Possible measures include (1) further relaxation of norms on the capital account, both NRI and ECB guidelines, (2) a likely cut in the SLR given the continued buoyancy in both credit and deposits and consequent demand for government securities to meet statutory requirements, (3) possible relaxation of interest rates to pump more liquidity to the economy and (5) creating more economic confidence by careful implementation of strong fiscal policies.
This is not the time to panic. As we know our fundamentals are very strong and we do have a very good public sector as a backbone. Nervous Indian investors joined a global selloff with weak industrial output adding to the overall gloom. As a result, stocks crashed, with the Bombay Stock Exchange Sensitive Index recording its worst week in almost 18 years, reflecting an Asia-wide slide in stock prices. At the same time one should make use of the situation by procuring cheap shares of good companies right now.
The Reserve Bank of India's dramatic decision to by a further percentage point to 7.5 per cent had some soothing effect for a while when the index pared nearly half the early morning losses of over 1,000 points. This is the single-biggest cut since 2001. This measure could pump atleast Rs/- 25000 crores in to the economy and which will improves the liquidity situation of the country. But that clearly was not enough to allay fears that the deepening credit crisis will push the global economy into recession. The rupee, meanwhile, fell to a lifetime low of 49.26 against the dollar before recovering to close at 48.47. The rupee fell as foreign institutional investors pulled out money from stock markets amid the global financial turmoil. It recovered again due to RBI intervention and sale of the US currency by local banks. There could be a domestic liquidity problem if foreign institutional investors flee en masse and want to take out dollars in exchange for rupees, but the market stabilization bonds that the RBI had issued can be bought back in order to pump rupees into the system. In addition, the fact that India's banks are so well-capitalized, in comparison with both American and European banks, imparts its own stability to the system.....
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