India’s benchmark Sensex was today dragged into the global stampede of selling as the financial turmoil that started in the US spread like a contagion and killed market sentiment across the world. Global stock markets plunged by up to 10 per cent on Friday amidst mounting fears that this week’s efforts by central banks and governments to stabilise the credit markets have failed.

Almost immediately after the markets opened, the Sensex plunged by over 1,000 points. The Reserve Bank of India (RBI) intervened to ease liquidity in the system by cutting the cash reserve ratio (the portion of deposits banks have to keep with the central bank) by another one per cent, thus taking the total reduction this week to 1.5 per cent, and releasing Rs 60,000 crore (over $ 12 billion) into the funds-starved system. In the backdrop of tight liquidity, the finance ministry cancelled a Rs 10,000 crore government borrowing plan.

Finance Minister P Chidambaram constituted a group comprising top bankers headed by Finance Secretary Arun Ramnathan to advise the government on liquidity requirements within a week. He also assured cash-strapped markets that the government would inject more funds into the system in the next 10-12 days through the supplementary demands for grants, which will come up for approval before Parliament later this month.

Ruling out any systemic problem, Securities & Exchange Board of India (SEBI) chairman C B Bhave said there was no unusual activity in the stock market, and no short selling by institutions in the cash market. Assuring more steps if needed, the RBI said, “market participants are assured that the Reserve Bank stands ready to respond swiftly to meet any liquidity requirements that may arise in the context of the highly volatile external situation.”

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