Coupled To Global Confidence Crisis

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Crisis deals under severe pressureIMF unsure if worst financial crisis is over

CRR cut to unlock Rs 40k cr; Sensex nosedives; PM rules out recession

Government and RBI moved aggressively on Friday to ease banks’ liquidity concerns and interest rate worries, as the global financial contagion spread to automobile companies in the US and steel firms in Europe.

In a first of sorts, the Reserve Bank cut by 150 basis points, twice in one week, the cash reserve ratio for banks while the finance ministry put a halt to an auction of Rs 10,000-crore government securities.

In a bid to instill confidence in the financial community, the Prime Minister said, “The global financial situation is being watched on a day-to-day, hour-to-hour basis. Capital outflows are putting pressure on liquidity and exchange rates.” The PM also asserted that “there is no question of a recession in India” and that the economy would grow by 7.5-8% this fiscal.

The Securities and Exchange Board of India also assured investors that there were no payment problems in the stock markets. This reversed the free fall of the domestic stock markets despite another bad day for Asian markets, with the BSE Sensex recovering from a 1,000-plus intra-day loss to end down at 800.51 points—a 7.07 % dip, and the rupee too recovered from 49.3 to a dollar to 48.93. RBI’s holding of forex reserves fell by $7.88 million to $283.94 billion.

Analysts now reckon that a rate cut by RBI this month is a clear possibility. According to Keki M Mistri, vice-chairman & managing director, HDFC, “A cut in the repo rate up to 0.50% by the RBI, when it conducts credit review on October 24, will be welcome.’’ Rohini Malkani, economist at Citibank, said given the worsening global situation, cuts in interest rates were not ruled out.

Inflation concerns have begun to recede as the latest data showed it has eased for the third consecutive week, ending at 11.80 %, whereas the index of industrial production slumped to its worst figure in a decade at 1.3%. But as net bank credit to the economy has risen by 23.2%, as per latest RBI data, showing demand from industry for investment was strong, the sector is battling liquidity squeeze with call rates—the rate at which they lend to each other—having crossed 23%.