Business Daily from THE HINDU group of publications
Tuesday, Oct 14, 2008
ePaper | Mobile/PDA Version | Audio | Blogs
Business Daily from THE HINDU group of publications Tuesday, Oct 14, 2008 ePaper | Mobile/PDA Version | Audio | Blogs |
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Opinion
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Editorial Boosting liquidity The RBI can do little to resurrect confidence in the West’s banking system, but it can tackle the worst consequence of the credit crisis through a bold and flexible policy play. After being criticised over the years for its conservative approach to capital account convertibility, the Reserve Bank of India (RBI) can now claim credit for having acted with foresight and not being adventurous. In Washington recently, Mr Rakesh Mohan, Deputy Governor, took pride in claiming that the central bank had protected the Indian economy and the banking system from the turmoil in the West. But both, RBI Governor, Dr D. Subbarao and Mr Mohan, separately stressed the vulnerability of the opened economy to the contagion. A burgeoning current account, large capital flows that funded the equity and bond markets and ECBs that companies used for their own expansion plans, exposed India to the downside of reverse capital flows and frozen money markets. Mr Mohan describes at length the mechanisms the central bank has in place to fight the worst effects of the deleveraging. Just how justified are these claims? Consider the direct effects of the contagion; borrowings have become not only expensive but also difficult. Even before September when the Lehman collapse rocked Wall Street, total capital flows had declined $4 billion between April and June this year to $14 billion; the decline in ECBs was dramatic from $17 billion in April-June 2007 to $1.6 billion in the same period this year. From a policy viewpoint the RBI can do little to resurrect confidence in the West’s banking system. But it can tackle the indirect and probably the worst consequence of the credit crisis — a liquidity shortage — through bold and flexible policy play. And it is in this field that the RBI falls short of the possible policy plays Mr Mohan adumbrates. Two CRR reductions that released Rs.60,000 crore into the banking system later, the economy still needs lubrication. The RBI has to unlock funds of a higher magnitude and Mr Mohan hints at further reductions in CRR and SLR and calls for a flexible use of LAF and MSS operations. The SLR was reduced by one percentage point from 25 per cent but should it not be cut further for the present when the economy is suffering from exhaustion? LAF repo operations and MSS used last year to mop up excess liquidity can be unwound so that the “vast pool of liquidity” can be put to productive use. Furthermore, the country’s real sector needs not just more funds but at lower rates than now when the government through its “well developed” securities market seems to be crowding out the private sector. While congratulating itself for moving slowly, the RBI runs the risk of being overwhelmed by rising needs for funds just when markets are frozen. It is time to unlock them — fast. Time for booster shots Forex reserves fall; bank credit rises RBI cuts cash reserve ratio ECB policy modified to include mining, exploration, refining sectors More Stories on : Editorial | CRR & Bank Rates
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