Fears of the United States-led financial crisis cascading to other countries, particularly Europe, combined with apprehensions that the $700 billion bailout package, history’s biggest, may not be enough, turned markets on both sides of the sub-continent in spots of red.
Long before the Indian markets opened and long after the benchmark BSE Sensex fell 725 points or 5.8 per cent, markets from Australia and Asia to Europe and the Americas thudded to touch new bottoms.
As the Sensex closed below 12,000 to touch a two-year low, the Dow in the US fell 4.1 per cent, reeling below the 10,000 mark, after four years.
<b1>In a surprise move to bring some liquidity into the Indian banking system, Reserve Bank of India (RBI) announced a 50 basis point (100 basis points make 1 percentage point) cut in its cash reserve ratio (CRR) to 8.5 per cent.
CRR is the money a bank needs to hold as cash in its reserves as a percentage of its deposits.
A liquidity enhancing tool, this cut will inject Rs 20,000 crore into the banking system from October 11 and is expected to reduce inter bank lending rates from its high double digits, which closed the day at 11.5 per cent.
But rates of home and other consumer loans will remain unaffected as “This measure is temporary in nature and will be reviewed on a continuous basis in the light of evolving liquidity conditions,” the RBI release stated.
“The measure will help to some extent,” said A.C. Mahajan, chairman, Canara Bank. “Liquidity crunch is to the extent of Rs 60,000-70,000 crore.”
“The liquidity infusion is good,” said M.S. Sundara Rajan, chairman, Indian Bank. “But any impact on lending rates will come only after a permanent move.”
“It is a measure to control panic,” said Rupa Rege-Nitsure, economist, Bank of Baroda.
Meanwhile, if traders in Mumbai were holding their heads, Russian and Brazilian traders were virtually buried in the debris. In both these countries, trading had to be shut down, following a 16.7 per cent drop in the Russian market and 15.1 per cent in Brazil.
While Asia fell on expectations, Europe collapsed when France's BNP Paribas agreed to acquire a 75 per cent stake in Fortis's Belgium bank following a failed government rescue plan. Around the same time, the German government replicated a $68 billion bailout for real estate lender Hypo Real Estate Holding AG. France and Germany fell 7.7 per cent and 7.6 per cent, respectively.
Capital markets regulator SEBI removed restrictions on participatory notes — a route that insisted on knowing the investor that a foreign institutional investor (FII) was trading on behalf of.
On a normal day, this would have cheered the markets, in anticipation of more FII inflows into the country and hence higher prices for Indian stocks. But on this Black Monday, there were no cheers from FIIs, most of which are withdrawing monies from all emerging markets, including India, to help capitalise their banks.