Mumbai: Noting that India was not insulated from global developments like the downgrade of the US, the Reserve Bank on Monday said it was closely monitoring the situation and would continuously assess the impact on the Indian economy and financial markets.
The RBI also said the entire policy and regulatory framework of the country must be “prepared to respond to turbulent financial market conditions arising out of external developments”.
“Developments relating to the US economy last week have significantly increased uncertainty about its prevailing condition,” the RBI said in a statement.
“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,” it added.
The US lost its top-notch ‘AAA´ rating this weekend and the development has further added to the worries of global markets, already grappling with the debt crisis in Europe.
“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,” the RBI said.
“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,” the RBI said.
The RBI further said that India was not insulated from such developments, as Friday’s market behaviour demonstrated here.
“It may, however, be noted that in the worst phase of the recent global financial crisis, the economy grew by 6.8%, 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 RBI said.
The RBI 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.
“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 said.
The central bank said that banking system has an adequate stock of Statutory Liquidity Ratio (SLR) securities, which are eligible for repo transactions.
“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.
“This exercise indicated that there were sufficient liquid reserves to meet the demand for forex even in a stress scenario,” it added.