Indian shares fall to new two-year low

SHARES SLUMP: India's stock exchange and currency have been hit by the global credit crunch. (Getty Images)

Indian share prices plunged Friday to a two-year low and the rupee tumbled, despite central bank moves to boost liquidity and government attempts to ease fears of an economic slowdown.

Panic gripped the market in early trade as the benchmark 30-share Sensex intra-day slid 9.6 percent to 10,239.76 points and the rupee fell to a record low of 49.3 against the dollar, on fears of further overseas fund outflows.

The central bank tried to douse concerns by pumping 400 billion rupees (8.2 billion dollars) into the system by lowering the cash reserve ratio for banks.

The Reserve Bank of India, which said it acted "due to the evolving liquidity situation in the context of global and domestic developments," has twice boosted liquidity into the system, bringing the CRR to 7.5 percent.

But investor fears heightened on weak economic data which showed that industrial output rose by just 1.3 percent in August compared with the same period a year earlier.

Prime Minister Manmohan Singh tried to calm nerves, saying Indian banks were insulated from the global turmoil.

"Our banking system is not affected in the same degree as they are affected in the rest of the world," Singh told a news conference in Kashmir's largest city Srinagar.

"The assets of our banks are not very large and our banks are well capitalised but there is a capital outflow from the country and that is putting on some pressure," Singh said.

He insisted India's economic growth in the current financial year ending March 31 next year was not likely to be hit.

"Despite the crisis our economy may still register a growth of 7.5 to eight percent in the current year," he added.

India's finance secretary, Arun Ramanathan, also insisted the domestic economy was solid.

"We are sufficiently strong enough to handle anything," he said in New Delhi.

Economists saw the RBI's move as one providing flexibility and the option to intervene in the foreign exchange markets and help the falling rupee.

The national currency has been on the slide for months, hit by sales of equities as overseas investors pull out their dollars from emerging markets such as India.

The rupee recovered in late Friday trade to 48.72 against the dollar, but was still at a five-year low.

The rapidly deteriorating condition of global financial markets is a bigger concern for the regulator.

Fears that the global credit squeeze will hit India's financial sector were so strong that shares of its largest private sector bank ICICI Bank fell by 19.7 percent by Friday's close.

ICICI Bank officials came forward to state that it had adequate rupee liquidity in the current conditions.

Indian shares finally closed down 7.07 percent or 800.51 points at 10,527.85, a level last seen in August 2006.

The RBI has been steadily tightening monetary policy since 2004 to rein in inflation which data released Friday revealed was now running at 11.8 percent -- and said it would "respond swiftly" to any external development.

Economists said it was too early to tell whether the bank's move could be followed up by an interest rate cut at its next policy meeting October 24.

"Inflation in India is still high. Other central banks lowered rates as inflation (there) had softened," Rupa Rege Nitsure, from the state-run Bank of Baroda, added.

The principal economist with rating agency Crisil, DK Joshi, added: "We could expect more (cash reserve) cuts... liquidity will remain a concern until global stability comes about."

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