International financial crisis exposes vulnerability of Indian economy

The BSE Sensex dropped by nearly 10 percent on Friday before the Reserve Bank of India (RBI) intervened for the second time that week to cut the cash reserve ratio by 1 percent to 7.5 percent, injecting 600 billion rupees (about $US13 billion) into the financial system. The BSE Sensex ended the day at 10,527.85, down 7.1 percent and the broader National Stock Exchange (NSE) Nifty index lost 6.65 percent.

Indias largest private sector financial group, ICICI Bank, dropped by as much as 28 percent, before ending the day down 20 percent. Its shares have dropped by 46 percent since the end of September amid concerns about the groups extensive operations in the global financial markets. Indias second largest mobile phone company, Reliance Communications, fell 21 percent, while the biggest real estate developer DLF Ltd fell 8.8 percent and top engineering firm Larsen & Toubro lost 8 percent.

The RBI had already cut the cash reserve ratio, or the proportion of deposits held by the central bank, by 0.5 percent on Monday when the BSE Sensex fell by 725. On the same day, the Stock Exchange Board of India lifted restrictions on foreign institutional investors imposed in October last year to defend the weakening rupee. The rupee fell to 49 to the US dollar on Friday, down from 39 in January.

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