Continuously evaluating impact of US crisis on Indian economy: RBI

Commenting on the recent developments relating to the US economy and its implication on the international economy as well as on Indian economy the Reserve Bank of India (RBI) said it was closely monitoring the situation and would continuously assess the impact on the Indian economy and financial markets. However, on the policy and regulatory framework, the RBI said 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 RBI said that, '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.'

In a statement central bank 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.' However, other leading agencies such as Moody and Fitch had maintained their AAA rating for the US. This development had increased the concerns over the global economy recovery as European nations are already fighting against the debt crisis. By adding further RBI said, '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.’

Commenting on the Friday’s sharp fall in the stock markets, RBI said, India was not insulated from such developments. However, on the impact of 2008 financial year crisis RBI said, 'It may, however, be noted that in the worst phase of the recent global financial crisis, the economy grew by 6.8 percent, 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.”
 
The apex bank also said its immediate priority was to ensure that adequate rupee and forex liquidity is maintained in domestic markets to prevent excessive volatility in interest rates and exchange rates. However, RBI feels banking system is not facing any liquidity pressure. It 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.'

'As regards forex liquidity, in anticipation of financial market turbulence related to the US debt ceiling impasse, the RBI has made an assessment of the ability of the forex reserve portfolio to meet potential forex requirements in the event of significant capital outflows. 'This exercise indicated that there were sufficient liquid reserves to meet the demand for forex even in a stress scenario,' it added.