US downgrade sends shivers across global markets
World markets continued to reel from S&P's shock downgrade of the US' top credit rating even as Europe struggles to contain the debt crisis in the region. Several top equity markets in the world suffered their worst declines since the 2008 financial crisis. The freefall was led by US indices. The Dow on Monday sank 634 points, only to rebound with a 429-point gain on Tuesday. The blue chip benchmark fell 519 points on Wednesday and surged 423.37 points on Thursday. The blue-chip index was still down 2.6% for the week till the end of Thursday's trade.
Strong demand for Treasury notes pushed yields to a record low following the Fed announcement. The demand for Treasury bonds skyrocketed following the Standard & Poor’s downgrade of the US credit rating to 'AA+' from 'AAA', sparking fear that the US economy could slip into another recession. Panicky investors dumped risky assets like equities and commodities, putting them into safe haven metals like gold and Treasury Bonds, pushing the price of both to record high levels.
The Federal Reserve's unprecedented move to put a timeframe to its loose monetary policy also failed to calm global financial markets. The US central bank pledged to keep rates at record low for at least another couple of years to shore up growth. However, the move was slightly nullified by a rare differences within the Federal Reserve Board. Three FOMC members raised a vote of dissent as they favoured keeping the phrase "extended period of time".
Similarly, the ECB too swung into action and vowed to buy sovereign bonds of Italy and Spain. The move brought a temporary relief in the European bond markets, with the yields on Italian and Spanish notes easing. But, on the whole the ECB intervention provided very little relief to investors.
The cost of insuring against defaults on debt held by the French government and French banks all rose sharply. French president Nicolas Sarkozy cut short his holiday to hold an emergency meeting about further budget measures amid rumours that the second-largest eurozone economy after Germany could be next to lose its top rating. But, the big ratings agencies reiterated that France's AAA status is safe for now.
The Swiss franc surged to a record high against the dollar in the wake of the Fed policy outcome. For the second time within a week the Swiss National Bank intervened in the currency market to halt the franc's appreciation, which threatens Swiss exports. The dollar gained against the franc after Swiss National Bank Deputy President Thomas Jordan reportedly said that the country could legally peg the franc to the euro temporarily to stem its strength.
G7 ready to support financial markets
ECB to buy Italian and Spanish bonds to check debt contagion
India in better shape to tackle global crisis: FM
India's fundamentals are strong and the country is in a better shape than other nations to meet the challenges arising out of the latest global financial turmoil, Finance Minister Pranab Mukherjee said. However, he added that there could be some impact on the Indian economy from the uncertain economic conditions in the US and the eurozone. "The recent developments in the US and the Eurozone have injected certain uncertainty in global markets. These developments could have some impact on India. But as India's growth story is intact and its fundamentals strong, we are in a better position than many other nations to manage the challenge," Mukherjee said.
India could see increased FII inflows unlike the 2008 global crisis, as it offers much superior returns vis-a-vis other countries, the Finance Minister told reporters in New Delhi. Mukherjee said there could be some impact on capital and trade flows in the short-term, but as India's growth story is strong FIIs could view it as an attractive investment destination. He didn't rule out temporary FII outflows though. He also said that implementation of pending reforms could be fast tracked. "The Government will fast track the implementation of pending reforms and keep a close eye on international developments," Mukherjee said.
"India's institutions are strong and we are prepared to address any concern that may arise on account of the present global situation," Mukherjee said. The Government would also focus on encouraging greater domestic consumption and give greater impetus to the drivers of domestic growth. He said that softening of the international commodity prices, especially crude oil, will help check inflationary pressures in India. "It will also help in maintaining the fiscal balance for FY12," he said. On the steps being taken by RBI, he said that in the immediate future the central bank's priority is to ensure that adequate rupee and foreign exchange liquidity are maintained to prevent excessive volatility in the interest rates and exchange rates.
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