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FM says economy sound, markets still take a hit

Although India’s policy-makers moved to soothe the nervous markets with reassurances on the economy’s fundamentals, stocks fell on Monday, catching the global flu in the aftermath of the US credit-rating downgrade by S&P. HT reports. Markets around the world

business Updated: Aug 09, 2011 02:34 IST

Although India’s policy-makers moved to soothe the nervous markets with reassurances on the economy’s fundamentals, stocks fell on Monday, catching the global flu in the aftermath of the US credit-rating downgrade by Standards and Poor’s (S&P) on last week.

Also, a fresh question mark loomed over India’s fundamentals, as S&P named it among some Asian economies that have much less elbow room to spend its way out of a crisis.

The Bombay Stock Exchange’s benchmark 30-share Sensex, shed 315.69 points, or 1.82%, to close at 16,990.18 on Monday — the lowest in nearly 14 months. http://www.hindustantimes.com/Images/HTEditImages/Images/09_08_11-metro1.jpg

The index recovered from a nearly 550-point drop after plunging 3.15% soon after opening to reach an intra-day low of 16,749.59. This was the index’s fifth straight loss, wiping out nearly R5 lakh crore — measured in terms of the fall in the value of all listed stocks.

Gold soared as a safe investment tool to Rs 25,000 per 10 gm, but the rupee weakened to Rs 45 to a dollar as global investors cashed out from equities.

S&P said, “The fiscal capacities of Japan, India, Malaysia, Taiwan, and New Zealand have shrunk relative to the pre-2008 levels. If a renewed slowdown comes, it would likely create a deeper and more prolonged impact than the last one,” it said in a statement.

Finance minister Pranab Mukherjee admitted that “these developments could have some impact on our economy as well” and there could be some impact on the capital and trade flows.

He, however, said, “India’s growth story is intact and its fundamentals are strong. We are in a better position than many other nations to manage this challenge.”

But given the interconnectivity of the global markets, an unexpectedly sharp disruption in financial markets in the developed world could affect the prospects for emerging economies, such as India.

About two-thirds of India's merchandise exports of about $245 billion are destined towards the US and

the European Union. There is growing apprehension about order books drying up as worried importers may hold back new shipments fearing a slowdown in their domestic economies.

Small and medium enterprises peppered across the country that ship products as diverse as handicrafts, gems and jewellery, garments and apparel could be the worst hit.

“To some extent, our export performance will be affected, but I still expect export growth to be reasonably high,” C Rangarajan, chairman of prime minister’s economic advisory council told HT.