Markets tumble as recession fears trump bailout

NEW YORK (Reuters) - Gloomy economic data and warnings from the U.S. Federal Reserve that hard times were still to come wiped out two days of relative optimism about the credit crisis and sent markets into free-fall on Wednesday.

In the worst one-day percentage declines since the stock market crash of 1987, the Dow Jones industrial average ended down 733 points or 7.87 percent, and the S&P 500 index lost 9 percent. The losses reversed Monday's record surges that had been sparked by optimism about bank bailouts.

Fed Chairman Ben Bernanke warned that credit market turmoil posed a "significant threat" to an already weak economy.

European shares shed 6 percent and U.S. crude fell more than $4 a barrel to a 13-month low of $74.54.

France, Germany and Britain called for leaders of the Group of Eight major industrialized countries to gather next month with the heads of emerging economies to consider a radical overhaul of the world's 60-year-old financial architecture.

The White House said G8 leaders were expected to meet this year on the worst financial crisis since the Great Depression.

The United States reported its biggest monthly decline in retail sales in more than three years, and Europe offered negative economic data and outlooks of its own.

Governments around the world have pledged $3.2 trillion in emergency measures, including taking stakes in banks to help them stabilize, rallying world markets on Monday.

Optimism quickly gave way to fears that major economies were headed for recession despite government intervention.

GLOOMY OUTLOOK FROM FED

"By restricting flows of credit to households, businesses, and state and local governments, the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth," Bernanke said.

Suggesting an openness to further interest-rate cuts, Bernanke said concerns about inflation were diminishing. He said it would take time to restore normal flows of credit.

Fed Vice Chairman Donald Kohn said latest readings on the U.S. economy have become more downbeat and the impact of a recent emergency interest rate cut had been "overwhelmed" by escalating mistrust among financial institutions unwilling to lend to one another.

The U.S. housing market has yet to hit bottom, and inventories of unsold homes are likely to remain elevated, Kohn said. It was probable the economy would remain "subpar" well into next year, gradually improving in late 2009 and 2010, he said.

As stocks around the world plunged and emerging markets were pummeled, the dollar and safe haven assets such as gold and short term U.S. treasuries rose.

"It looks like everything that's economically sensitive is getting hit pretty good," said Scott Vergin, portfolio manager at Thrivent Financial in Minneapolis, Minnesota.

"The thing is, how much has the credit crunch already impacted the real economy?" added Vergin. "That's what everyone's really worried about."

SUMMIT TO REFORM FINANCIAL SYSTEM

At a European Union summit in Brussels, British Prime Minister Gordon Brown led calls for an international summit and urged a rebuilding of the International Monetary Fund (IMF) as the keystone of global market regulation.

EU leaders called for a summit soon to revamp financial structures set up at the Bretton Woods conference in 1944.

Dutch Finance Minister Wouter Bos said a stronger role for the IMF was needed "in the absence of American leadership at the moment." French President Nicolas Sarkozy told the summit a "new form of capitalism" was needed.

The United States on Tuesday offered to take up to $250 billion worth of equity in its banks, an astonishing move in the home of free market capitalism.

U.S. President George W. Bush stressed that the move was temporary. "I'm confident in the long run this economy will come back," he told reporters.

The U.S. action followed an agreement by European leaders to undertake a 2.2 trillion euro ($3 trillion) rescue of European banking giants, which have been hit by a credit crisis brought on by defaulting mortgages in the United States.

SIGNS OF RECESSION

Signs of a looming recession abounded on Wednesday.

The U.S. government said retail sales dropped 1.2 percent in September, the biggest monthly decline in three years, and wholesale prices slipped 0.4 percent.

The Fed's Beige Book report said economic activity weakened across the United States in September as businesses revised capital investments and consumers curtailed spending.

U.S. bank JPMorgan Chase said third-quarter profit plunged 84 percent, while Wells Fargo & Co reported a 25 percent drop in earnings.

British unemployment rose to 5.7 percent, its highest level in eight years, according to government data. And German economic growth will only be slightly above zero in 2009, Finance Minister Peer Steinbrueck said.

The European Central Bank said it would allow banks to swap a larger range of their assets for central bank funds and offer extra U.S. dollar liquidity through foreign exchange swaps.

Southeast Asian nations, backed by $10 billion from the World Bank, were the latest to join the rescue effort, agreeing to create a multibillion fund to help banks.

Iceland, driven close to bankruptcy by the effects of frozen credit markets on its banks, cut interest rates a staggering 3.5 percentage points as its officials pursued help from Russia via a multibillion-euro loan.

The economy is dominating the U.S. presidential campaign, which sees a final debate between the candidates on Wednesday.

Democrat Barack Obama has accused Republicans of presiding over unfettered financial deregulation while John McCain has sought to regain his footing on economic issues after drawing criticism for saying U.S. fundamentals were strong.

RBI cuts CRR by 100 basis points

The Reserve Bank of India on Wednesday cut the Cash Reserve Ratio (CRR) further by 100 basis points to 6.5 per cent of NDTL with effect from the current reporting fortnight that began on October 11, 2008. This measure will release additional liquidity into the system of the order of Rs.40,000 crore.

On Tuesday, October 14, 2008, the RBI decided to conduct a special 14 day Repo at 9 per cent per annum for a notified amount of Rs 20,000 crore with a view to enabling banks to meet the liquidity requirements of mutual funds. Rs 3,500 crore of this facility was utilised by banks yesterday.

Further, the Reserve Bank announced this morning that this 14 day repo facility will now be conducted every day until further notice upto a cumulative amount of Rs 20,000 crore for the same purpose. Banks obtain liquidity from the Reserve Bank under the Liquidity Adjustment Facility (LAF) against the collateral of eligible securities that are in excess of their prescribed Statutory Liquidity Ratio (SLR).

It has been decided, purely as a temporary measure, that banks may avail of additional liquidity support exclusively for the purpose of meeting the liquidity requirements of mutual funds to the extent of up to 0.5 per cent of their NDTL. This additional liquidity support will terminate 14 days from the closure of this special term repo facility announced on October 14, 2008. This accommodation will be in addition to the temporary measure announced on September 16, 2008 permitting banks to avail of additional liquidity support to the extent of up to 1 per cent of their NDTL.

RBI instituted a mechanism of Special Market Operations (SMO) for public sector oil marketing companies in June-July 2008 taking into account the extraordinary situation then prevailing in the money and forex markets. RBI will institute a similar facility when oil bonds become available.

Under the Agricultural Debt Waiver and Debt Relief Scheme Government had agreed to provide to commercial banks, RRBs and co-operative credit institutions a sum of Rs.25,000 crore as the first instalment. At the request of the Government, RBI has agreed to provide the sum to the lending institutions immediately. This liquidity support will be provided by the Reserve Bank of India under Section 17(3b) and Section 17(4E) of RBI Act to scheduled banks and NABARD respectively.

Interest Rates on FCNR (B) Deposits

Currently, the interest rate ceiling on FCNR(B) deposits of all maturities has been fixed at Libor/Euribor/Swap rates for the corresponding maturities minus 25 basis points for the respective foreign currencies. In view of the prevailing market conditions, RBI has decided to increase, with immediate effect, the interest rate ceiling on FCNR (B) deposits by 50 basis points, i.e., to Libor/Euribor/Swap rates plus 25 basis points.

Interest Rate on NR(E) RA Deposits

Currently, the interest rate ceiling on NR(E) RA for one to three years maturity should not exceed the Libor/Euribor/Swap rates plus 50 basis points for US dollar of corresponding maturity. In view of the prevailing market conditions, RBI has decided to increase, with immediate effect, the interest rate ceiling on NR(E)RA deposits by 50 basis points, i.e., to Libor/Euribor/Swap rates plus 100 basis points.

Banks will be allowed to borrow funds from their overseas branches and correspondent banks up to a limit of 50 per cent of their unimpaired Tier I capital as at the close of the previous quarter or $10 million, whichever is higher, as against the existing limit of 25 per cent.

The above measures will be reviewed on a continuous basis in the light of the evolving liquidity conditions.

The Reserve Bank is monitoring developments in the financial markets closely and continuously and would respond swiftly and even pre-emptively to any adverse external developments impinging on domestic financial stability, price stability and inflation expectations. The Reserve Bank is committed to maintaining financial stability and active, and flexible liquidity management using all policy instruments is an integral part of this objective.

Nifty stock futures fall 6 pc in Singapore

SINGAPORE: Nifty stock index futures fell 6 per cent in Singapore on Thursday, indicating a sharply lower market open as global markets reeled from recession worries.
By 0215 GMT, Nifty futures were down 200 points at 3,139. On Wednesday, India's 50-share NSE index fell 5.1 per cent to 3,388.4, while the main 30-share BSE index declined 5.9 per cent.

The MSCI index of Asia-Pacific shares outside of Japan traded 5.4 per cent lower on Thursday after downbeat US economic data spread fears of a deep global slowdown.

On Wednesday, India's central bank slashed its cash reserve requirement for banks for the second time in a week on Wednesday, releasing 400 billion rupees ($8.2 billion) into the banking system to boost money market liquidity.