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Central banks around the world cut interest rates in Unpredictable moment this evening in the first such collective response to the global financial crisis which sent fresh waves of panic through stock markets, including that in India.
But the initial response of the markets was not encouraging: Wall Street turned negative and European stocks sank to a near five-year low, shrugging off the co-ordinated cuts.
Earlier in Mumbai, the sensex plunged below 11000 points for the first time since August 9, 2006 — a helpless, hand-wringing moment for investors who were still groping for answers to why the index had fallen by 10000 points in exactly nine months.
By evening in India, the world was witnessing a dramatic — and desperate — intervention led by the US Federal Reserve which cut a key interest rate — the federal funds rate — by 50 basis points to 1.5 per cent. This is the rate at which US private banks lend money to each other for overnight loans.
In the damburst that followed, China, the European Central Bank (ECB) and the apex banks in Britain, Canada, Sweden and Switzerland also cut key interest rates. Interest rate cuts are an age-old pill that is supposed to stimulate markets because the reductions make it easier for companies to borrow.
Will the cuts work this time? That was the question playing on the lips of the financial superpowers as Wall Street opened for trading a few hours after the central bank action. But the Dow Jones index fell in see-saw morning trade. In Delhi, late evening by then, the Union cabinet met to consider the global crisis and assess its impact on India. Asserting that India would grow at 8 per cent this year, finance minister P. Chidambaram said the government was watching the global crisis closely and would react swiftly to the needs of the market. He said the RBI had already taken steps to pump funds into the system and would do so again if required. US officials said this was the first time ever that the Federal Reserve co-ordinated a reduction in interest rates with other central banks. The closest thing to a precedent for today’s action came in November 2001, when the Federal Reserve and the European Central Bank announced a rate reduction on the same day. But those moves were nominally independent, and they did not involve any additional foreign central banks.
The European Central Bank had been reluctant to lower rates because policy makers there tended to see the meltdown primarily as an American problem with secondary ripple effects in Europe. But any lingering comfort outside the US evaporated last week, as money markets froze around the world and major corporations and banks across Europe began suffocating.
Before the rate cuts, Asian stock markets were clobbered with the Nikkei plunging 9.4 per cent to its biggest one-day fall since 1987.
In Mumbai, investors were groping for answers. “There is blood on the street; cold logic says that’s when you should buy stocks. But what do you do when it’s your own blood on the floor?” asked an investor. On January 10 this year, the sensex had peaked at 21206.77; today it hit a low of 10740.76 — a precipitous slide of 49.4 per cent this year. Even though the index clambered up to close at 11328.36, it was down by 3.14 per cent from Tuesday’s close. Domestic funds started buying stocks aggressively when the sensex toppled by 954 points to the day’s low around noon.
The rupee slid to its lowest level in five years at 48.75 to the dollar. However, the currency hardened on news of the rate cuts and closed at Rs 48. Gold continued to surge and hit an historic peak of Rs 13,820 per 10 grams
Originally posted here - The Telegrpah India
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