FM's assurance fails to enthuse market sentiment

Rupee falls below 56 on Thursday

The benchmark BSE Sensex shed 388 points and Nifty posted its biggest percentage fall in a year, a day after Federal Reserve Chairman Ben Bernanke suggested a reversal in US monetary stimulus. Finance Minister P Chidambaram’s assurance that external factors had little relevance to the situation in India did not appear to help the falling market.

Chidambaram said there was no need for any kind of nervousness and stressed that Bernanke’s statement has been misunderstood.

"We have been looking at what's been happening in the market. We think that the Federal Reserve Chairman Bernanke's statement has been misunderstood or misinterpreted," Chidambaram told reporters. The Finance Minister also said that the issue of quantitative easing in the United States, China and Japan had no relevance at all to the situation in India. In the Indian context, one must see that  inflation was coming down for both indices — WPI and CPI and foreign inflows too were copious.

However, his assurances had little effect as the rupee too breached the key psychological level of 56 to fall as low as 56.01 per dollar on Thursday.

"If we read the statement carefully, he has clearly indicated that he will continue with quantitative easing in the foreseeable future at about $85 billion a month or so," Chidambaram said.

The minister further said that quantitative easing is continuing in Japan and Europe and there has been no change whatsoever, and the flows into India during May have been extremely copious.

He, however, admitted that certain numbers coming out of China were disappointing and the quantitative easing programme in Japan could run into problems.
Chidambaram’s Economic Advisor Raghuram Rajan too expressed the hope that the US Fed had no intent to end quantitative easing early.

“My reading of (Bernanke's) statement is that they are going to continue. In that sense, we will have to deal with consequences of quantitative easing when it comes,” Rajan said.

"We are not the worst, but we are also not the best either, in terms of depreciation. We are watching the rupee, but I won't say it is out of sync with what is happening in other countries," Rajan said.