Pranab allays fears of a payments crisis

Finance minister hopes good capital inflows in the medium term.

As stock markets continued to face bearish pressure, the government on Tuesday cited investment bankers’ assessments to argue the economy’s fundamentals were strong enough to handle the situation arising out of the American credit downgrade by Standard and Poor’s.

While agreeing there could be volatility in stock markets, Finance Minister Pranab Mukherjee said he was confident these would be manageable and there would be good capital inflows in the medium term. He sought to allay any fears of a payments crisis due to the volatility in equity markets. “Some of the investment banks have upgraded India to (a) ‘marketweight’ (rating). That means the basic fundamentals are strong and macroeconomic recovery is moving towards a positive direction,” he told reporters.

Yesterday, Goldman Sachs upgraded India to ‘marketweight’ after keeping an ‘underweight’ rating for over a year. It based this on a likely improvement in India’s macroeconomic situation, lower oil prices, attractive stock valuations and the government’s recent initiatives on policy reforms. And, Bank of America Merrill Lynch said, “We would advise investors to ignore inevitable chatter about India’s ‘external vulnerabilities’ as the world becomes a more and more volatile place. In our view, the (reserve Bank of India) has sufficient fire power to fend off contagion as any other emerging market.”

Mukherjee said India’s economic fundamentals were capable of meeting any challenge posed by the US downgrade and the crisis in some euro zone nations. He said the downgrade has created some problems for India, but the country could handle any situation arising out of international developments.

“The challenge is there, but we have the capabilities of facing these... Collectively, with the efforts of all concerned, particularly with the cooperation of the RBI, we will be able to face the challenges,” he said.

The Bombay Stock Exchange’s benchmark Sensex on Tuesday closed 132 points down, after recovering from an early loss of 560 points, something he noted as comparing well with Asian markets.

Thomas Mathew, joint secretary in the capital markets division of the finance ministry, said foreign investors were unlikely to resort to heavy selling and good capital flows were expected in the medium term.

He said there could be some volatility in the next few days, but it would be manageable. “We do not expect heavy selling by FIIs (foreign institutional investors),” he added. He also said there were no payment problems at all, despite the massive volatility on the bourses.