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India is uninsulated from global economic crisis: RBI

By Biswajeet Panda

Mumbai, Aug 8: The Reserve Bank of India, on Aug 8, stated that the country was not insulated from global developments like the credit ratings downgrade of the United States of America. It also stated that it is keeping a close eye on the situation and would continue to assess the impact on the Indian economy and the financial markets.

The apex bank also warned that the entire policy and regulatory framework of the country must be "prepared to respond to turbulent financial market conditions arising out of external developments."

In a statement, the RBI said, "Developments relating to the US economy last week have significantly increased uncertainty about its prevailing condition."

And added, "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."

Referring to the US credit rating downgrade from AAA to AA+, the RBI said, "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."

And added, "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."

Stating that India was not insulated from such global crisis, he said, "It may, however, be noted that in the worst phase of the recent global financial crisis, the economy grew by 6.8 per cent, suggesting high resilience emerging from domestic factors. While downside risks to growth may have increased in the wake of global developments, they are likely to have limited impact."

Outlining its immediate priority, the apex bank said, "Rupee liquidity is being provided through the repo window of the Liquidity Adjustment Facility (LAF). As of now, the banking system does not face any liquidity pressures, as evident from the low level of dependence on liquidity injections under the LAF."

It also stated that it has an adequate stock of Statutory Liquidity Ratio (SLR) securities, which are eligible for repo transactions. He said, "As regards forex liquidity, in anticipation of financial market turbulence related to the US debt ceiling impasse, the Reserve Bank made an assessment of the ability of the forex reserve portfolio to meet potential forex requirements in the event of significant capital outflows."

And added, "This exercise indicated that there were sufficient liquid reserves to meet the demand for forex even in a stress scenario."

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