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%.

Releasing Rs 60,000 crore through the CRR cut in the financial system, RBI assured that it is monitoring international developments closely and would respond swiftly and ?even pre-emptively to any adverse external developments impinging on domestic financial stability, price stability and inflation expectations and the continuation of the growth momentum of the Indian economy.?

Simultaneously the finance ministry has set up a committee under the finance secretary Arun Ramanathan to make a ?quick assessment of the requirements of liquidity and advise the government.? It will submit an interim report within a week.

Finance minister P Chidambaram also assured investors that all bank deposits were safe, while liquidity was likely to come back as government pumped in money in the form of payment of dues to meet the higher salary bill of government employees from the Sixth Pay Commission award and a rise in social sector expenditure.

Within minutes of opening in the morning, the Indian stock markets slipped by over a 1,000 points?their biggest weekly loss in 18 years. The BSE Sensex finally closed at 10,527.85. The index came within 186.4 points of a trading halt in intra-day trade. The S&P CNX Nifty of the National Stock Exchange lost 233.70, or 6.7%, to 3,279.95. Nifty futures for October delivery were down 6.6% to 3,303.30.

ICICI Bank, Reliance Infrastructure, Reliance Communications, and Jaiprakash Associates led the fall in equity prices on concern the credit crisis will slow the world?s economies.

Amitabh Chakraborthy, president-equities at Religare Securities, said, ?This is an event which takes place, say, once in a century. Global markets are stabilising day by day, and domestic markets will also follow suit. But it will take a few months. I believe domestic markets will see a further downfall of 15% from now.?

?India is well-knit in the global financial network. The repercussions of the global crisis will have some impact on the outlook for India as well. This adjustment of expectations is what is primarily getting reflected through the stock markets as extreme risk aversion,? said Hitesh Agrawal, head of research, Angel Broking. The need to provide for margins as the markets nosedived also made many brokers unwind their positions.

Reliance Industries declined 7.3%, its lowest in one-and-a-half years. Infosys dropped 2.3% after cutting its full-year profit forecast. ICICI Bank Ltd fell the most since its shares were listed in 1997. State Bank of India, however, gained 2.6%. Foreign investors have sold shares worth a record $9.84 billion this year.

Meanwhile, the yields on the 10-year benchmark paper fell to the lowest since May after the RBI reduced the CRR to 7.5% from 9%. The 10-year benchmark 8.24%, 2018 government paper closed at 7.79%, compared to 7.98% on Wednesday.

Global Turmoil

Japanese victim: Japan?s Yamato Life Insurance Co collapsed as the government looked to prop up smaller banks. Tokyo shares suffered their biggest rout since a 1987 crash. The Nikkei tumbled 9.6%, taking its losses for the week to 24%

Stocks slump: Global stocks tumbled on recession fears, driving the MSCI World Index to its worst week, with 19% loss, in three decades. MSCI Asia Pacific sank 6.4%.

Strong yen: Yen rallies to 99.11 to a dollar as investors shun higher-yielding assets and is up 6% this week

Bush, G7 meet: G7 finance ministers and central bankers meet in Washington. Bush to meet G-7 ministers on Saturday morning at the White House. IMF MD Dominique Strauss-Kahn and World Bank President Robert Zoellick to also attend

IEA cuts forecast: The International Energy Agency cuts its oil demand growth forecast for 2008 to the lowest rate in 15 years, represents a 0.5% growth rate. Oil tumbles more than $5 a barrel on Friday

Russian package: Russia?s lower house, the Duma, approves measures worth $86 billion to assist banks

Detroit bankruptcy: GM, Ford and Chrysler may be forced into bankruptcy by slowing economies and dwindling auto sales, says S&P analyst. US industrywide sales tumbled 27% in September, the most in 17 years