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India Fundamentally Strong: FM

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Policymakers on Monday rushed to calm jittery investors, pledging to take necessary steps to weather a new bout of global economic uncertainty stoked by US and euro zone sovereign debt worries, helping shares pare their losses. Amid a fall in the stock markets in the wake of economic problems in the US, Finance Minister Pranab Mukherjee said India's fundamentals are strong and the government is ready to address any concern that may arise, while admitting there could be some impact. "We would focus on encouraging greater domestic consumption and give impetus to the drivers of domestic growth", Mukherjee said while talking to reporters outside Parliament. Chief Economic Adviser to Finance Ministry Kaushik Basu reiterated the government stand saying the centre and the RBI will step in to contain the impact of an uncertain global economic situation, if needed. The RBI said the Indian banking system does not face any immediate liquidity stress, and it vowed to ensure adequate rupee and forex liquidity.The government, Mukherjee said, will fast track the implementation of the pending reforms while keeping an close watch on international developments. India, Mukherjee said, is in a better position than other nations to meet the challenge posed by the developments in the US and the Eurozone. The BSE Sensex, which tumbled more than 3 percent in early trade as a rating downgrade of the United States by Standard & Poor's triggered panic selling across Asian equity markets, recovered to end the day 1.82 per cent lower. Shares across Asia fell sharply on Monday despite efforts by global policymakers to stem a collapse in investor confidence after S&P downgraded US credit rating from AAA to AA+ last week. Another rating agency Moody's, repeated a warning on Monday that it could cut the US rating before 2013 if the fiscal or economic outlook weakens significantly but said it saw the potential for a new debt agreement in Washington to cut the budget deficit before then. The Finance Minister expressed confidence that India could see faster and greater FII inflows unlike after 2008 meltdown, in view of the higher returns that global investors could get here. "The recent developments in the US and the Eurozone have injected certain uncertainty in global markets. These developments could have some impact on India. But as India's growth story is intact and its fundamentals strong, we are in a better position than many other nations to manage the challenge," he said. Mukherjee also mentioned about the steps being taken by RBI to deal with the problem. "The most important part of the RBI statement is that in the immediate future the Reserve Bank priority is to ensure that adequate rupee and foreign exchange liquidity are maintained in domestic markets to prevent excessive volatility in the interest rates and exchange rates," he said, adding, "this is very much reassuring". The Finance Minister also spelt out views expressed by G-20 Finance Ministers and Central Bank Governors. "We, the Finance Ministers and Central Bank Governors of G-20, affirm our commitment to take all necessary initiative in a coordinated way to support financial stability and to foster stronger economic growth in a spirit of cooperation and confidence... "...We will remain in close contact throughout the coming week and cooperate as appropriate, ready to take action to ensure financial stability and liquidity in financial markets. " Moreover, we will continue to work intensively to achieve concrete results in support of strong, sustainable and balanced growth in the context of G-20 framework on growth," the finance minister said. US investment bank Goldman Sachs on Monday upgraded India to "market weight" from "underweight," given a likely turn in the macro cycle, lower oil prices, lower valuation, and policy reforms. The Melting World Worldwide, the grim market mood was caught by economist Nouriel Roubini writing in the Financial Times. "The misguided decision by Standard & Poor's to downgrade the US at a time of such severe market turmoil and economic weakness only increases the chances of a double dip and even larger fiscal deficits," he warned. "So can we avoid another severe recession? It might simply be mission impossible." The rout was all the more alarming as it came despite an assurance from G7 finance ministers that they were "ready to take action to ensure stability and liquidity in markets". In early trade, the BSE Sensex fell 2.5 per cent on Monday, while the rupee weakened past 45 to the dollar for the first time in five weeks following a global equities rout. In an announcement early on Monday before the markets opened for trading, RBI said it would ensure adequate rupee and forex liquidity, a move to calm the jittery markets. Noting that India was not insulated from global developments like the downgrade of the US, the Reserve Bank of India (RBI) Monday said it was closely monitoring the situation and would continuously assess the impact on the Indian economy and financial markets. The RBI also said the entire policy and regulatory framework of the country must be "prepared to respond to turbulent financial market conditions arising out of external developments". "Developments relating to the US economy last week have significantly increased uncertainty about its prevailing condition," the RBI said in a statement. "The Reserve Bank is closely monitoring all key indicators and will continuously assess the impact of global developments on rupee and forex liquidity and macroeconomic stability. We will respond quickly and appropriately to the evolving situation," it added. The US lost its top-notch 'AAA' rating this weakened and the development has further added to the worries of global markets, already grappling with the debt crisis in Europe. "A sharp fall in US equity markets on Thursday was followed by a downgrade in the long-term US sovereign rating by rating agency Standard & Poor's from AAA to AA+ with a negative outlook on Friday," the RBI said. "Two other rating agencies, Moody's and Fitch, had recently maintained their AAA rating, but suggested that this could change. "The downgrade has raised concerns of continuing turmoil in global financial markets, as investors re-allocate portfolios in response to heightened risk perceptions stemming from both developments," the RBI said. Inflation Outlook Riding on its robust domestic demand, India managed to withstand the global financial crisis in 2008-09, clocking an economic growth of 6.8 per cent. Worries over the health of the global economy are clouding the export outlook for Asia's third-largest economy -- after recent double-digit export growth -- but are also helping moderate global commodity prices, particularly oil. Oil fell as much as $3 a barrel on Monday as worries over a possible double-dip recession spread after S&P cut the United States' top-tier credit rating and European central banks struggled to contain a deepening debt crisis. A moderation in global oil prices is expected to help rein in India's oil subsidy bill, or the cash compensation the government offers to state-run firms for cheaper fuel sales, and ease inflationary woes. "It (the fall in international crude and commodity prices) can have a dampening effect on Indian inflation," said Kaushik Basu, chief economic adviser to the finance ministry. India has been struggling with high inflation for the past two years. The RBI has raised interest rates 11 times since mid-March 2010 to tame price pressures, but headline inflation of 9.44 per cent in June continues to be well above the central bank's comfort zone of 4-4.5 per cent. Policymakers globally intensified efforts to contain the fallout from the historic downgrade of the US debt rating. "I can take the rating as a special event which is telling us that a double-dip recession will occur ... that is possible," Basu said. The European Central Bank stepped into bond markets on Monday, backing up a pledge to support Spain and Italy with the aim of averting financial meltdown in the euro zone, while the G7 and G20 offered soothing words to investors shaken by a historic downgrade of the US debt rating. US Still Needs To Find Further Cuts: Moody's Moody's repeated a warning on Monday it could cut the US rating before 2013 if the fiscal or economic outlook weakens significantly but said it saw the potential for a new debt agreement in Washington to cut the budget deficit before then. With markets in the US still to open after rival Standard & Poor's stripped the United States of its AAA rating on Friday, Moody's said in a statement its own decision to affirm the US rating on August 2 was on the condition that further cuts were found. It said the United States had a tough job ahead to come up with additional deficit-reduction measures needed to safeguard its Aaa rating from Moody's, but a new debt agreement in Washington was not impossible before 2013. Three days after rival Standard & Poor's stripped the United States from its AAA rating, Moody's said it could do the same before 2013 if fiscal discipline weakens in the next few months or the economy deteriorates significantly. Questions about whether US lawmakers will be able to agree on further budget savings next year lie on the center of the disagreement between the two ratings agencies. While S&P downgraded the United States to AA-plus after an Aug. 2 debt deal fell short of its expectations, Moody's is willing to give the government more time tackle its debt problems. (Agencies)