11/03/2008, 00.00
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India faces repercussions of financial "shock"

This is the opinion of experts, considering the grave lack of liquidity in the Indian financial system. The central bank has slashed interest rates and pumped hundreds of billions of rupees into the market. But Prime Minister Singh warns that the global crisis will be worse and longer than expected, and the country will not go unscathed.

New Delhi (AsiaNews) - Signs of a recovery today on the stock market of Mumbai, at its highest level in two weeks due mostly to financial companies, after the central bank on November 1 cut interest rates and pumped liquidity into the system. But with high inflation and slowing growth, Prime Minister Manmohan Singh warns that the effects of the global financial crisis will be worse than the forecasts.

Today, in a meeting with business leaders, Singh said that the global crisis will be "more severe and prolonged" than expected. "A crisis of this magnitude was bound to affect our economy, and it has." "Global uncertainty is also tending to dampen investor sentiment," the prime minister said, adding that he is confident that India will be able to contain inflation. The banking sector is under special scrutiny, and public banks have been instructed to take countermeasures in order to "protect the Indian financial system from possible loss of confidence or contagion effect. The situation is being watched on a day to day basis and more steps will be taken if required."

In order to combat the slowdown in economic growth (at 7.5% year-over-year as of March 31, 2008, compared to 9% the previous year), the central bank cut the interest rate for the second time in two weeks on November 1, and reduced - for the first time in 11 years - the reserve requirements for credit institutes. This decision marks a reversal of the previous monetary policy, intended - as central bank governor Duvvuri Subbarao said just one week ago - to combat rising inflation. Inflation was at 10.68% in the week that concluded on October 18, falling below 11% for the first time since May, but remaining much higher than economic growth.

Arvind Sampath, a financial expert, commented that these provisions are intended to respond "to the most pressing need of the hour, which is to ease liquidity constraints in the system."

"The system has been under stress because of liquidity shortfall," confirms analyst Jayesh Shroff. Experts agree that if New Delhi does not quickly resolve the liquidity crisis, it could soon suffer a true financial "shock."

Over the past week, the cost of money has more than tripled in India, contrary to the tendency in the rest of Asia, where interbank lending rates have fallen. The main Mumbai stock market has lost about 52% since January, wiping out hundreds of billions of dollars. The 12.7 billion dollars that foreign investors "withdrew" from the Indian stock market in 2008 is also a drag (although commerce minister Kamal Nath says that "We have had foreign direct investment growth of 120% compared to the previous year"). On October 31, the interest rate for overnight loans reached 21%, with an evident liquidity crisis for the financial world. According to the central bank, the reduction in monetary reserves has permitted the introduction of 400 billion rupees (8.23 billion dollars) into the financial system. For similar reasons, there has also been a percentage point reduction in the deposits that credit institutes are required to invest in government bonds or state companies.

The foreign trade deficit is also a serious problem for the country: in September, exports rose by only 10.4% (13.7 billion dollars), compared to 27% in August, with a rise in imports of 43.3%, equivalent to 24.4 billion and a monthly deficit of 10.6 billion.

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