Govt steps up firefighting as Sensex swings below 11k before recoup

With the markets exhibiting dramatic volatility on Wednesday, the government sought to soothe frayed nerves by saying that the fundamentals of the Indian economy remain strong and liquidity will be infused into the system to tide over any problems that may crop up.

In a late night statement, the Union Cabinet assured the financial sector that the government will ensure the stability of the financial system and respond swiftly to any emerging needs.

The 30-share benchmark index of the Bombay Stock Exchange (BSE) fell 953.48 points intra-day to 10,740.76 points, taking cues from the Asian markets. The Sensex, however, recouped the initial losses and closed the day with a loss of 366.88 points, or 3.1%, at 11,328.36 after assurances from the government that the economy is strong and can withstand the global financial crisis.

The rupee closed at 48 to a dollar, after falling as low as 48.81 intra-day. as foreign investors remained net sellers in the market.

Admitting that ?liquidity has developed as problem in recent weeks?, the Cabinet, however, endorsed the soundness of the Indian banking system. ?There is no need for any fear in the country about the soundness of the banks?.

Finance minister P Chidambaram asked investors to refrain from making any ?hasty or precipitous decisions?, since the economic fundamentals remain strong.

?We will address the liquidity issue. (RBI) Governor is already on record, if necessary he will take further measures to infuse liquidity,? he said.

The Sensex has lost more than 44% this year, wiping out all of the gains of year 2007. The S&P CNX Nifty of the National Stock Exchange fell 92.95, or 2.6%, to 3,513.65. Nifty futures for October delivery were 1.8% down at 3,566. Share prices pared losses after the UK government said it will invest about $87 billion in an unprecedented step to prevent a collapse of the banking system. In a coordinated move, the US Fed, European Central Bank, Bank of England and People?s Bank of China lowered the policy rates by 50 basis points to restart the credit markets.

The government said the medium-term growth of the Indian economy will remain strong despite the global financial crisis. ?The fact is there is a global meltdown and India is not completely insulated. But our medium-term (next 3-4 years) growth prospects are strong. The Q1 growth figures of 7.9% is quite healthy and even if the economy slows down further to 7.5-8%, I will still term this growth as robust,? Planning Commission deputy chairman Montek Singh Ahluwalia said.

Meanwhile, releasing the latest FDI figures for the country, commerce & industry minister Kamal Nath said India?s strong fundamentals would continue to attract foreign investment and the $35 billion FDI target for the fiscal would be achieved. India received $14.6 billion of FDI between April and August 2008, a 124% rise over $6.5 billion in the corresponding period in 2007.

?This is unprecedented…this is a good sign in comparison to the global economic situation,? Nath said. Endorsing the growth prospects of the economy, the Cabinet statement said ?the investment pipeline continues to be very high, with huge capacity being added in sectors like steel, oil and automobile.?

Stating that FDI inflows has been ?little less but not negative?, Ahluwalia said, ?We do not depend on FII, but our aim should be to attract more FDI from investment point of view, particularly in infrastructure sector.?

Market experts say that the investor sentiment is running very low despite the emergence of various positive factors. ?There is a lot of fear in the market, which led to the huge slide. There are in fact more positive factors such as softening of crude prices and commodities that were not there at the beginning of the year,? said Ajit Dayal, director, Quantum Advisors.

Earlier in the day, equities plunged across Asian markets, extending a global sell-off that has wiped out more than $5 trillion of market value in the past week. The Nikkei 225 Stock Average witnessed its biggest drop since 1987.

Software stocks suffered after Goldman Sachs Group Inc cut its recommendation on the industry. Tata Consultancy lost 5.1% to Rs 546.60, the lowest 2004. Indiabulls Real Estate Ltd declined 13% to Rs 118.15, the lowest since its listing. Around 18 companies in the Sensex touched their yearly low on Wednesday.

Fears that the global selloff will prompt a pull out of more money from the country led the rupee to the lowest level in five-and-a-half years. The Indian currency declined for a fourth day. The rupee closed at 48 against the dollar, the weakest level since 2003. Analysts expect the rupee to touch 49 this year. Bloomberg data showed implied volatility on one-month dollar-rupee options rose to 24.3% on Wednesday, the highest in at least nine years. The rupee reduced its losses after the world?s central banks huddled themselves in a co-ordinated effort to cut interest rates.