How India pacified investors

Indian 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.

BSE Sensex, which tumbled more than 3 per cent 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.

Earlier, the The Reserve Bank of India (RBI) said in a statement it was monitoring the global situation and would "respond quickly and appropriately to the evolving situation".

The RBI said the Indian banking system does not face any immediate liquidity stress, and vowed to ensure adequate rupee and forex liquidity.

Similar assurances came from Finance Minister Pranab Mukherjee, who said India's economic growth and strong fundamentals make it better placed than other economies to tackle the uncertainty in global markets.

"There could be some impact on the capital and trade flows. But as India's growth story is strong, we could see FIIs (foreign institutional investors) seeing India as an attractive investment destination even if there is any temporary outflow," Mukherjee said, citing higher returns offered by the country.

"(We are) ready to take action to ensure financial stability and liquidity in financial markets."

Mukherjee also said the government would speed up policy reforms to make India an attractive investment destination. His comments helped India's main stock index trim losses.

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 reform.

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.

While Indian policymakers remain sanguine about the domestic economy amid global uncertainty, the country's export sector could face turbulence after recent double-digit growth.

India's merchandise exports rose an annual 37.5 per cent to $246 billion in the fiscal year that ended in March. But as uncertainties in the United States and the euro zone mount, the government on Monday said the sector "would be lucky" to achieve 20 percent annual growth in 2011-12.

"You should start seeing a clear slowdown from August-September," Trade Secretary Rahul Khullar said.

Worries over the health of the global economy are also helping moderate global commodity prices, however, particularly oil, which fell more than more than 3 per cent on Monday as the US downgrade fuelled growth worries 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 at 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 intervened dramatically in bond markets on Monday, backing up a verbal pledge to support Spain and Italy with action in an attempt to avert a financial meltdown in the euro zone.