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“We’ll infuse more liquidity into monetary system”

Special Correspondent

Cabinet assurance to calm nerves of investors in bourses

NEW DELHI: With the global financial meltdown having its convection impact on India, the Union Cabinet has assured the people of “swift” responses to tackle the credit crisis and, if necessary, infuse more liquidity into the country’s monetary system.

The special Cabinet meeting was convened on Wednesday, at the instance of Prime Minister Manmohan Singh, at a time when the central banks of the U.S., the U.K., Canada and Europe were cutting back interest rates in concert to spur lending and consumer spending so as to fight the onset of recession.

Midway through the meeting, Finance Minister P. Chidambaram came out to issue a Cabinet statement: “We wish to assure the people of India that the Indian economy has the capacity and the resilience to weather the storm that is blowing across the world. We have enough instruments to ensure the stability of the Indian financial system and we will continue to provide credit and other support for the growth of the economy.”

Strong balance sheets

Evidently, the assurance was meant to calm the nerves of panic-stricken investors in the bourses in the wake of the collapse of financial giants in the West.

Even as the Bombay Stock Exchange’s Sensex witnessed a 1,000-point slump in intra-day trading — led by a decline in banking stocks — Mr. Chidambaram said: “Our banks have strong balance sheets. They are well capitalised. The capital adequacy ratio of each of our banks is well above Basel norms and above the norms stipulated by the RBI. Besides, they are well regulated, and this has been universally acknowledged. Our banks have shown great resilience and continue to provide credit to all sectors of the economy. No one need have any fear about the soundness of India’s banking system.”

RBI steps

The Minister noted that one of the major effects of the global meltdown was the drying up of liquidity and capital flow, and gave the assurance that action would be taken to avert a worsening of the situation.

“We are conscious of the fact that liquidity conditions in India too have tightened in the last few weeks. Our authorities have responded to the situation. The RBI has taken steps to infuse more liquidity into the market. We will 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.

Two priorities

To queries on inflationary pressures still impacting the economy, he said: “Inflation control is still a very high priority. There is an equally important priority of maintaining the stability of the Indian financial system. Keeping both priorities in mind, we will take steps.”

Mr. Chidambaram maintained that central banks the world over were taking coordinated action and he was sure that the RBI was in touch with them to take appropriate measures.

Turning to the reasons for the market slump, the Minister said: “What is happening in the stock market is not exactly a reflection of the liquidity conditions. The stock market is driven by sentiments and when we are talking about the stock market, we are talking about 30 or 50 stocks which make up the index in the BSE and NSE… my advice to them [investors] is to take informed decisions.”

Ripple effects

The Cabinet statement pointed out that the U.S. and many European countries were in the grip of a severe financial crisis and its ripple effects were being felt across the globe, including India. “The authorities in the U.S. and the Europe have taken a number of bold and unconventional steps in order to stabilise the financial situation. We hope that their efforts will succeed,” it said.

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