India's central bank on Friday cut its economic growth projection for the year from 8 percent to 7.5 to 8 percent, warning that a deep and protracted global downturn is likely, but left the key interest rate unchanged after slashing it in a surprise move earlier this week, reproted AP.
"The global financial system is in a crisis of unprecedented dimensions," the Reserve Bank of India said in its quarterly policy review. If the financial crisis persists, emerging economies, which have so far been relatively insulated from the meltdown, could be hard hit through trade losses, eroded export competitiveness and diminished foreign financing, the bank said.
The spiral of uncertainty that originated in bad mortgage debt in the U.S. "is transmitting also to countries outside the epicenter of the crisis," the bank said. "India cannot be immune to these global developments."
The gloomy picture painted by the central bank, and its decision to leave the rate unchanged, contributed to a 6.7 percent fall in the benchmark Sensex stock index in morning trade. Disappointing earnings reports and continued foreign selling also weighed on the market.
On October 20, the bank cut India's key lending rate by one percentage point to 8 percent, the latest in a series of aggressive steps to shore up the economy, and Friday vowed to take further "unconventional" policy action to stave off the global crisis, if warranted.
Until recently, Indian regulators have been more concerned about controlling double-digit inflation and moderating the rapid inflow of foreign funds that helped power a four-year economic boom and stock market rally.
The financial crisis changed all that.
Now regulators are doing all they can to attract more capital and keep it flowing through the financial system.
Indian banks don't have any direct financial exposure to US sub-prime assets but the nation's financial system has suffered "knock on effects" of the global credit squeeze and crisis of confidence, the central bank said.
Domestic money markets have been unusually tight in recent weeks, external financing has dried up, the rupee has plummeted, and foreign investors have pulled some US$12 billion from Indian equities, driving the nation's key stock index down by about 50 percent this year.
The bank said it remains commited to getting inflation below 5 percent as soon as possible and continues to aim for 7 percent inflation by March despite the weakening outlook for growth and falling global commodities prices.
India's annual inflation, as measured by the benchmark wholesale price index, has moderated recently, to 11.1 percent in the week ended October 11 from a peak of 12.9 percent in early August, but remains much higher than 3.1 percent a year earlier.
"We cannot afford to let the guard slip on our inflation vigil," the bank said, adding that double digit inflation is "clearly unacceptable."
The bank said sustained foreign direct investment and a surge in deposits from nonresident Indians have mitigated the outflow of foreign institutional investment, but warned that the current account deficit - which hit at a record $10.7 billion in the April-June quarter - would likely rise.