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After four years the economy is witnessing the emergence of a softer monetary policy. As it had noted in its mid-term review, the Reserve Bank of India (RBI) is responding “swiftly” to the uncertain and unpredictable times with measures that would, in normal circumstances have been reserved for bi-annual credit policy revisions. To that extent, the cut in repo rate of 50 basis points and the 100 basis point reduction in cash reserve ratio (CRR) lower the two ra tes to 7.5 per cent and 5.5 per cent respectively. The central bank also announced a string of other measures aimed at easing liquidity pressures on banks from non-banking finance companies (NBFCs) and mutual funds. Judging by the response to the US Fed rate cut, the equity market should welcome the RBI measures.

Given the volatility in equity markets, first-instant responses will have to be sustained by more positive reactions from the real economy. The liquidity “trap” is no longer lack of credit but reluctance to lend and critically, unwillingness to spend. Evidence of both has been mounting since late August. Large companies are planning to cut back on production and product expansion; some are also cutting jobs and hiring levels while banks are fussy about lending to erstwhile blue chip borrowers such as airline companies. Policymakers from the Prime Minster downwards point to the current global turmoil and looming recession in export markets and shake their heads. But too much need not be made of exogenous factors because hints of the present downturn were evident last year. In that September quarter, production was already weakening in autos and consumer durables; the Prime Minster’s Economic Advisory Council in January this year scaled down GDP forecasts and mid-year slid it back even further to around 7.5 per cent; high interest costs had been identified as the prime cause for slipping consumer demand. The global crisis simply exacerbated the domestic situation.

The RBI’s Saturday rate cuts provide the Finance Minister, who meets with India Inc. today and bank chiefs tomorrow, with proof of alertness to fund requirements. The problem lies in a new risk aversion, an excessive caution that has infected the agents of that robust growth of the last four years. Bankers, producers and consumers are staying away from one another. That is what Mr. Chidambaram has to reckon with.

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