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India to stay 'vigilant' to ensure financial stability

New Delhi: India said Thursday it would take all necessary steps to ensure stability in financial markets as it sought to calm investors nervous over the US Federal Reserve's decision to cut monetary stimulus.

The finance ministry said the government and the Reserve Bank of India were remaining vigilant to the possible impact on the markets of the Fed's decision to further taper its stimulus programme.

Just six months ago, fears of US tapering pushed the Indian rupee to record lows as foreign investors removed funds in the quest for better returns at home, prompting the central bank to tighten monetary policy to bolster the currency.

India's economy was now prepared for the US taper, the ministry said, pointing to higher foreign exchange reserves of $295 billion and robust foreign investment inflows, among other factors.

“This decision was expected and should not in any way surprise or affect the Indian markets,” the finance ministry said in a statement.

“However, both the government and the Reserve Bank of India will continue to remain vigilant and will take whatever steps are necessary to ensure that there is stability in the financial markets,” the ministry said.

The US Federal Reserve stayed the course on tapering stimulus for the US economy Wednesday, reducing asset purchases by $10 billion for a second straight month.

The Fed said the US economy was growing firmly enough to further trim stimulus, which will fall to $65 billion a month from February, spelling a steady tightening of global financial liquidity.

Shares on the Bombay Stock Exchange fell over one percent before retracing some losses to finish 0.72 per cent lower at 20,498.25 points.

Indian shares have been roiled in the past few sessions by fears the Fed tightening could hit growth in emerging market economies, as well as concerns of a slowdown in China.

“The majority of concerns relating to this have already been built (factored) in by the market,” Arun Singh, senior economist with research firm Dun & Bradstreet.

Indian financial markets have so far not suffered the sell-offs seen in other emerging markets such as Turkey, Brazil and South Africa this month.

At the same time, Singh cautioned, “we need to wait for a week or two to see how much we (Indian financial markets) have digested the Fed tapering.”

The Indian currency closed at 62.56 rupees to the dollar after hitting an over two-month low of 63.32 on Monday.

“What India needs now are concrete steps from the government and the central bank to ensure currency stability and growth revival. Foreign investors need to be assured about returns or capital could flow out,” Singh said.

The Reserve Bank of India (RBI) this week unexpectedly hiked its benchmark lending rate by a quarter point as it gave taming inflation higher priority than spurring the sluggish economy.

The rupee tumbled to a record low of 68.845 to a dollar on August 28 last year, and staged a muted recovery only after the authorities tightened the monetary policy and clamped down on imports to prevent widening of a bloated current account deficit.

The currency has fallen 15 per cent in the past year and is one of the worst-performing in Asia.

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India to stay 'vigilant' to ensure financial stability

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