Having steered the economy through the 2008 global meltdown to a reasonably high growth trajectory, the Central government and the Reserve Bank of India (RBI) on Monday swung into action to counter the adverse impact of the downgrading of the U.S. credit rating on Friday by Standard & Poor's and the Euro zone debt crisis.

As the stock market spooked in tune with acutely negative global sentiments and Standard & Poor's caution to the Asia-Pacific countries on possible downgrades in the near term, Finance Minister Pranab Mukherjee sought to allay fears of investors and industry, saying the country's economic fundamentals were strong and the government was ready to address any concern that might arise from the evolving situation.

The RBI also assured the industry that it would maintain adequate liquidity and quickly respond to their problems.

“Our institutions are strong and [we] are prepared to address any concern that may arise on account of the present situation,” Mr. Mukherjee said in a statement.

He also said that the government “will fast track the implementation of the pending reforms and keep a close eye on international developments... We would focus on encouraging greater domestic consumption and give an impetus to the drivers of domestic growth.”

To avert panic selling on the bourses, the RBI, in a statement earlier in the day, said: “We will respond quickly and appropriately to the evolving situation … In the immediate future, the Reserve Bank's priority is to ensure that adequate rupee and forex liquidity are maintained in domestic markets to prevent excessive volatility in interest rates and exchange rates.”

Gold zooms past Rs.25,000-mark

Despite these assurances, the markets went into a tailspin after a massive sell-off by Foreign Institutional Investors (FIIs). Investors ended up losing over Rs.1 lakh crore. While the rupee shed 23 paise against the U.S. dollar as a consequence of the capital outflow, there was a scramble to buy gold as a safe bet: it crossed the Rs.25,000-mark for 10 gm.

At the day's close, the BSE Sensex, which slumped nearly 550 points in intra-day trade, recovered only partially to lose 315.69 points at 16,990.18, the lowest since June 10, 2010. With this, investors lost about Rs.1 lakh crore in a single day to take the total value erosion in the past five trading sessions to an estimated Rs.5 lakh crore.

In his statement, while admitting that the adverse developments in the U.S. and the Eurozone would have some impact, Mr. Mukherjee said: “...as India's growth story is intact and its fundamentals are strong, we are in a better position than other nations to meet the challenge.”

He was confident that the country could see faster and greater FII inflows, unlike after the 2008 meltdown, as global investors could get higher returns. “There could be some impact on the capital and trade flows. But as India's growth story is strong, we could see FIIs seeing India as an attractive investment destination, even if there is any temporary outflow.”

A positive fall-out was the softening of international commodity prices, especially those of crude oil which would help to control inflation and maintain fiscal balance during the current fiscal.

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