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Wednesday, October 15, 2008

Indian markets suffer as global recession fears grow

MUMBAI (Reuters) – The rupee tumbled towards a recent record low and shares hit their lowest in more than two years on Thursday following a plunge in overseas share markets on recession fears, and investors took shelter in government bonds.

The benchmark 10-year bond yield shed 26 basis points to 7.65 percent in early trade, helped by a hefty cut in banks' reserve requirements by the Reserve Bank of India (RBI) and a raft of measures by authorities to ease tight liquidity.

Overnight interbank interest rates, which soared to 23 percent last week as the global financial crisis spread to Indian markets, fell to a much more normal 6.75/7.00 percent, from a close of 10.00/10.25 percent, as the cut in the cash reserve ratio to 6.5 percent oiled the wheels of the banking system.

"The RBI so far has been prompt in undertaking measures to boost liquidity and further measures can be expected conditional on the domestic liquidity situation," JP Morgan said in a note.

The rupee fell to 49.05 per dollar in early deals from a close of 48.5250/5400, after hitting a record trough of 49.30 last week.

It was trading nearly 1 percent down at 48.9700/9900 at 0418 GMT, with traders saying state-run banks were selling dollars above 49.00, possibly on behalf of the central bank but that was not clear.

The rupee is particularly vulnerable to outflows of foreign investment from the stock market, which has shed nearly half its value this year after a 47 percent gain in 2007.

Foreign funds have so far sold a net $11.1 billion worth of Indian shares after buying a record $17.4 billion in 2007.

The BSE Sensex index shed nearly 6 percent in early trade, with index heavy-weight Reliance Industries leading the fall along with banks, before recovering slightly to be down about 4 percent.

"High current account deficit and an existing tight banking system condition means India will remain exposed to the contagion from global financial markets," Morgan Stanley said in a note.

"We believe that India will continue to face challenges in managing domestic liquidity conditions until the global financial market environment improves significantly."

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