India's central bank said Monday it would ensure adequate rupee and forex liquidity, in a move to calm markets after a U.S. rating downgrade rattled investors already reeling under a gloomy world economy.
The announcement just before the markets opened for trading failed to ease jitters and shares fell more than 3 per cent, while the rupee weakened to its lowest in five weeks. Bond yields fell to 3-week troughs as investors sought safe-haven government securities.
The Reserve Bank of India (RBI), which has raised interest rates 11 times since mid-March 2010 to control high inflation, said the country's economyhad high resilience to weather the storm.
"While downside risks to growth may have increased in the wake of global developments, they are likely to have limited impact," the central bank said.
The RBI, supported by India's foreign exchange reserves of more than $300 billion, said it was monitoring the global situation and would "respond quickly and appropriately to the evolving situation".
Shares across Asia fell sharply on Monday despite efforts by global policymakers to stem a collapse in investor confidence after S&P downgraded U.S. credity rating.
The United States lost its top-tier AAA credit rating from Standard & Poor's on Friday, hours after investors alarmed by the euro zone debt crisis forced Italy to speed up an austerity drive.
Around 60 per cent of India's foreign currency assets, which comprise the bulk of the forex reserves, are estimated to be held in U.S. Treasury paper and the global developments will make the RBI's job more tough.
India has been trying to keep a lid on stubbornly high inflation even as the economy shows signs of slowing.
Headline inflation rose to 9.44 per cent in June, above the central bank's comfort level of 7 per cent for end-March.
By 0552 GMT, the main stock index was down 2.9 per cent, while the partially convertible rupee was at 45.01/02 per dollar against 44.735/740 on Friday. The benchmark 10-year bond yield was down 9 basis points at 8.22 per cent.
U.S. 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.
The RBI said the banking system does not face any immediate liquidity stress and banks can borrow by pledging government bonds and also avail a recently introduced emergency borrowing facility of the central bank.
"This will help stabilize the call rate within the LAF corridor, which is currently 7-9 per cent," the RBI said, referring to the liquidity adjustment facility.