Euro zone crisis hits stock markets too

Even as the rupee plunged to its historic low of 54.56 against the U.S. dollar in keeping with the global bloodbath on the bourses, the Finance Ministry on Wednesday put a brave face on it, indicating that the Indian currency would find its own level of stability as and when the eurozone crisis blows over.

Allaying concerns over the sharp slide of the rupee, Finance Minister Pranab Mukherjee indicated in the Rajya Sabha that the free fall in the currency and the stock market was caused not by any intrinsic weakness of the Indian economy but due to the global risk aversion following the heightened uncertainty in the eurozone stemming from the fresh crisis in Greece.

Global canvas ‘complex'

Dubbing the global economic canvas “complex,” Mr. Mukherjee said: “It is because what has happened, what was decided by the electors of Greece in defeating a particular political party, raised the questions of uncertainty of resolving the eurozone crisis and the package which was worked out by the leaders of Europe… there is a question mark.”

Mr. Mukherjee sought to explain how any economic crisis in any part of today's globalised world had an impact on the economy of any other country and, therefore, the currency and stock market mayhem should not lead to panic as stability would return when the crisis was resolved.

“Whether Greece will be revived, whether the package which was worked out by ECB [European Central Bank] where IMF [International Monetary Fund] is going to make a contributory role by providing additional $600 billion support, now that has been put in question mark… Uncertainty is prevailing, not confined to Greece, not confined to those four countries, but the entire Asian market today has taken a hit. This is the complex situation in which we are living today and we cannot ignore that,” Mr. Mukherjee said.

Impact on markets

Perhaps, the Minister's statement — which also referred to a slew of undefined austerity measures in the pipeline to tackle the tough economic situation — had some impact.

The Bombay Stock Exchange's 30-share Sensex, which had plummeted to 15,974.60 in intra-day trade for the first time since January 12, recovered a tad to close at 16,030.09, but still reflected a decline of 298.16 points as foreign investors engaged in all-round selling in 28 out of the 30 stocks on the sensitive index.

The National Stock Exchange's 50-share Nifty also kept pace with a loss of 84.55 points at 4,858.25.

Marginal recovery

As for the rupee, which has been subjected to a battering in recent weeks mainly on account of the widening current account deficit (CAD) and rising inflation, also recovered from its all-time low of 54.56 in intra-day trade to close marginally better at 54.50 to the dollar and thereby surpassed its December 2011 low of 54.30.

Clearly, although the rupee was already under pressure on account of India's widening CAD and investment-related concerns, the new development in Greece has led to fresh global risk aversion, which is putting additional pressure on the currency.

The depreciation in value of the rupee, according to foreign exchange dealers, has been owing to strong capital outflows on account of sell-off of stocks as investors are wary of riskier equity assets and are finding the U.S. dollar a safer haven.

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