Indian markets too remain under stress

The global mess kept pounding Indian markets, which twice avoided trading freeze this week. The Sensex tumbled 16% and the Nifty lost 14% after sinking to 17-year lows of 10,239 and 3198, respectively. The Government, SEBI and RBI announced measures to ease the pain in the markets, but the same met with limited success, as the massacre continued unabated. The Government expanded the scope of infrastructure to allow companies in mining, exploration and refinery sectors to raise overseas loans through the ECB route. Capital market regulator SEBI removed restrictions on offshore derivative instruments (ODIs) in both, the cash as well as futures & options segments of the market. SEBI chief C.B. Bhave said the 40% cap on ODIs, including participatory notes (PNs), out of the total assets under custody in the cash market will also be done away with.

But, the biggest step was taken by the RBI, which slashed CRR by 150 basis points to 7.5% to boost liquidity. The reduction in the CRR comes into effect on Saturday and will pump Rs600bn into the banking system. Also, the Government canceled bond auctions worth US$2bn. The central bank sprung into action after call rates in the inter-bank overnight market soared to a 19-month high of 23%, and the rupee hit an all-time low of 49.30 bringing this year's losses to 20% before it regained some ground.

Finance Minister P. Chidambaram and other top government officials reiterated the strength of the Indian economy and promised to take further steps to provide more funds to the banking sector. "We will take steps to infuse liquidity because we recognise that the flow of credit smoothly and efficiently through the system is vital to the stability of the financial system," Chidambaram said.

Finance Secretary Arun Ramanathan said that the RBI has assured the government it was keeping a close watch on the market and would take appropriate steps. The Government set up a panel, which includes representatives from the RBI, to assess the liquidity problem and report back within a week, he said. The RBI blamed the money market squeeze squarely on international conditions and assured investors that the Indian economy was in good health.