Date:18/09/2008 URL: http://www.thehindu.com/2008/09/18/stories/2008091856171200.htm

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No payment crisis in bourses

Special Correspondent

NEW DELHI: Despite foreign institutional investors (FIIs) pulling out over $1 billion so far from India, the government does not visualise any grave threat to the economy. The domestic capital markets, though, are expected to be impacted by the ongoing financial turmoil in the U.S., aggravated by the collapse of the giants, investment banker Lehman Brothers and insurer AIG.

Despite the deep financial crisis in the U.S., which has had a ripple effect on all global bourses, the government is not anticipating a payment crisis, thanks to the extreme volatility in the country’s stock exchanges.

“As of now, turbulence [in the U.S. financial market] may have some impact on capital markets, but payment obligations are being met currently and there won’t be any payment related problem,” top Finance Ministry sources said here on Wednesday.

The sources said there was, in fact, no discernible trend of FIIs pulling out of capital markets. FII investments were flowing into debt markets, including government securities, following their marginal pullout from the equity segment.

Interestingly, even as the U.S. benchmark stock index Dow Jones finished in positive territory on Tuesday following the Fed’s $85-billion rescue package for AIG, the Indian bourses remained extremely cautious and at times jittery. The BSE’s Sensex ended Wednesday’s trading 256 points lower at 13,262.90.

According to SEBI data, FIIs pulled out a net $212.30 million from equity markets on Monday and $156 million on Tuesday following the news of Lehman Brothers filing for bankruptcy. Alongside, however, they ploughed $62.80 million in the debt market on Monday and $73.40 million the next day. According to the data, FIIs have offloaded shares worth $1,096.3 million so far this month.

The turmoil in the U.S. financial market prompted the Reserve Bank of India to impose payment restrictions on the Indian entities of Lehman Brothers. Simultaneously, the central bank took steps to halt the depreciation of the rupee against the U.S. dollar.

Detailing the measures, it said: “In the light of the current development in the forex markets, the Reserve Bank will sell dollars through agent banks to augment supply in the domestic forex market or intervene directly to meet any demand-supply gap.”

Following the RBI intervention, the rupee gained 62 paise against the dollar to Rs 46.27/28 from a two-year low of Rs. 46.89/90 on Wednesday.