Bears likely to tighten grip on India share prices

Rampaging bears are set to tighten their grip on Indian shares, among Asia's worst performers this year, as a worsening global financial crisis pushes the world economy to the brink of a recession.

Sermons from the authorities that India's domestic-demand driven economy was in better shape to weather a worldwide slowdown are finding few takers, as investors, led by foreign portfolio managers, cramp the exit to salvage whatever they can before the market slumps further.

"We are staring at the worst economic crisis in living memory," said equity strategist V. Venugopal. "Trust is in shatters: people are worried about their deposits in banks; and banks are scared to lend even among themselves. It's going to take a long, long time to get over this."

Combined action by central banks and governments across the world to save large financial firms and revive confidence is looking like too little, too late.

Venugopal said the co-ordinated action by global central banks, from the US to Europe and China, would have had a positive impact on economies in normal circumstances, but these were extraordinary times and the damage was too huge to be undone without more pain.

"There has to be more determined, bold action," he said. "For India specifically, the timid central bank must slash interest rates to spur demand."

The Reserve Bank of India (RBI) swung into action last week by cutting the cash reserve ratio - the deposits that commercial banks must keep with the central bank - by 1.5 percentage points to 7.5 per cent. The move, which took effect yesterday, released Rs600 billion in funds for banks.

The move came after overnight call rates soared to a 19-month-high of 23 per cent as a cash crunch with banks forced the government to call off a bond auction. The action was also hastened by the rupee's plunge to its lowest ever at Rs49.3 against the dollar.

The Sensex dived 9.6 per cent on Friday to 10,239.26, wiping away more than half the value from its record of 21,206.77 on January 10. By the close the index regained some ground but posted its biggest weekly slide in 18 years - down almost 16 per cent at 10,527.85.

- The writer is a journalist based in India