The Hindu Business Line : RBI getting focussed on specific sectors

New Delhi, Nov. 15 The most noteworthy thing about the measures taken by the RBI on Saturday is that, at long last, it is getting focused on specific sectors, rather than using broad spectrum liquidity measures to buoy up the sagging economy.

The need for this became clear when the banks, in spite of the huge infusions of liquidity they received during October, refused to step up their lending. It is too risky, they said. The cut in risk weights for housing, for example, was needed because risk weights had been increased when bank lending to the sector was getting excessive.

The simple way to understand what is being done now is to see it as a reversal of what had been done during the last few years because the circumstances have also now been reversed. Thus, dollars are now flowing out faster than they are coming in, hence the Foreign Currency Non-Resident steps; credit flow has dried up; industrial growth has slumped; and so on. Each measure announced on Friday addresses itself to one of these problems.

It is not very clear, though, how effective these measures will be because in a sense, the RBI is also directing firms to borrow abroad, rather than domestically. But liquidity there has dried up even more than here. So the credit squeeze is not about to go away.

The time, in fact, has come to realise that monetary policy will no longer work. If the government is serious about giving a boost to the economy, it has to quickly come out with a major public investment stimulus.

But with the combined fiscal deficit of the centre and States now running at over 10 per cent when the off-balance sheet items are taken into account, the government has very little headroom for this.

In the end, the problem is one of confidence. Homeopathy of the sort now in evidence, will not help solve it.

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