An anxious government on Wednesday sought to calm embattled Indian stock and currency markets that swung violently amid a worsening growth outlook.
“The Indian economy has the capacity and the resilience to weather the storm that is blowing across the world,” Finance Minister P Chidambaram said after Prime Minister Manmohan Singh and his Cabinet took stock of the situation late in the evening.
Chidambaram said the government and regulatory authorities would watch the situation carefully and continuously, and respond swiftly to the needs of the market. “Steps will be taken to infuse more liquidity, if required,” he said.
Taking consumer worries head-on, he said: “No depositor should have any concern on his deposits in any Indian bank.” Earlier, Planning Commission Deputy Chairman Montek Singh Ahluwalia, referring to depositors, had said: “Their money is safe.”
On Monday, the RBI slashed the cash reserve ratio — the percentage of deposits banks have to park with the RBI in cash — from 9 per cent to 8.5 per cent. This will give banks an extra Rs 20,000 crore to lend.
The Sensex hit a low of 10,741 points — an intra-day fall of 954 points — before recovering to close at 11,328. Commerce and Industry Minister Kamal Nath said: “The fall is a transitory phenomenon due to frenzy and sentiment.”
“The fundamentals of our economy are strong,” said Chidambaram. “On current trends, we expect that the growth for the whole year will be close to 8 per cent.”
But the International Monetary Fund (IMF) projected a sharp deceleration in India’s growth momentum. India’s growth rate is expected to be 7.9 per cent in 2008 and slide further to 6.9 per cent in the next year, said the IMF’s World Economic Outlook (WEO) released on Wednesday.
India’s economy expanded 7.9 per cent in the three months ending June 30 — the slowest since 2004 — in the backdrop of high inflation leading to high interest rates resulting in sluggish industrial growth.
“Inflation is still a priority and there is an equally important priority of maintaining the stability of the financial system,” he said.
The inflation rate has remained over a worrisome 12 per cent during the past several weeks, before falling a shade below to stand at 11.99 per cent in the last reported week. A persistently falling domestic currency has also been a major concern. The rupee closed at Rs 48 to a dollar on Wednesday — the lowest in more than five-and-half years.
“A number of steps have been taken to encourage inflows — expanding external commercial borrowing window and the restriction on participatory notes has been almost completely removed,” Chidambaram said.
These measures will improve investor sentiments, improve capital inflow and help the rupee find an appropriate level, he said. His advice to investors: “Do not take decisions in panic.”