INDIA said on Thursday (January 30) it would take whatever steps necessary to ensure stability in its financial markets after the US Federal Reserve again cut its 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 US Federal Reserve's decision to further taper its stimulus programme.
The ministry said India's economy was prepared for the taper, pointing to India's boosted foreign exchange reserves which stand at $295 billion and robust foreign investment inflows, among other factors.
"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 in a statement.
"This decision was expected and should not in any way surprise or affect the Indian markets," it said.
The US Federal Reserve stayed the course on tapering its stimulus for the US economy on Wednesday (January 29), reducing asset purchases by $10 billion for the second month in a row.
The Fed said the US economy was growing firmly enough to further trim the stimulus, which will fall to $65 billion a month from February, spelling a steady tightening of global financial conditions.
Asian markets slumped on Thursday, extending a global rout on renewed fears of a capital flight from emerging economies – including from India – as dealers look for safer investments back home.
Shares on the Bombay Stock Exchange were down 1.08 per cent to 20,424.65 points on Thursday on the news.
Indian shares have already seen a bit of a roil in the past few sessions on worries that US Fed tightening its money tap could hit growth in emerging market economies amid a slowdown in China.
"This (fall) is a knee jerk reaction. We need to wait for a week or two to see how much we (Indian financial markets) have digested the Fed tapering," said Arun Singh, senior economist at the research firm Dun and Bradstreet.
The currency fell to as low as Rs62.90 to the dollar in early trade on Thursday before recovering to 62.75 rupees, from Monday's more than two-month low of 63.32
"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 the capital could flow out," Singh said.
The Reserve Bank of India (RBI) this week unexpectedly raised its key interest rates by 25 basis points to tame inflation even as the economy faces low growth.
