The government and regulators worked with uncharacteristic speed on Monday in a bid pump more cash into the hands of banks, aiming to soothe capital and foreign exchange markets that have swung violently amidst piling debris of a global financial crisis. The Finance Minister promised a slew of new measures.
“We are working on more measures that will infuse liquidity, make credit intermediation smoother, and increase the confidence of depositors and investors. We hope to be able to announce them shortly,” Chidambaram said on a day when officials in Mumbai and Delhi kept in constant touch, with one eye on bailout plans in Western economies whose crisis-ridden banks caused a financial flu across the continents.
Buffeted by an extraordinary global financial shock and with many advanced economies close to moving into recession, policy makers in the North Block are grappling with options to keep growth intact while containing prices.
A specially constituted group headed by Finance Secretary Arun Ramanathan would submit an assessment report on liquidity requirements later this week.
Ramanathan said on Monday the committee was looking at ways to improve cash conditions and will meet again in a week's time. “We have shared thoughts on what are the requirements. We need to address the liquidity demand," he said after the panel’s first meeting on Monday.
Chidambaram had briefed Prime Minister Manmohan Singh about the emerging situation twice in the last two days. India Inc, caught in an attack of sluggish domestic demand and surging input costs, could slide into a crippling profit squeeze with industrial growth slipping to a worrisome 1.3 per cent in August.
Chidambaram said the government, Reserve Bank of India (RBI) and market regulator Securities Exchange Board of India (SEBI) have been in close consultation with each other during the weekend.
“I have spoken to the governor, RBI and chairman, SEBI several times in the last two days. We are coordinating our actions. We are watching the situation carefully and we will respond swiftly according to the needs of the situation,” Chidambaram said.
All eyes are now on the October 24, when Reserve Bank of India (RBI) governor D.Subba Rao presents the mid-term review of the credit policy.
The repo rate, the benchmark short-term lending rate, has been increased thrice since March 2007 and now stands at 9 per cent and many are expecting a cut in rates.
The RBI has cut the cash reserve ratio by 1.5 percentage points to 7.5 per cent. This would inject about Rs 60,000 crore into the system amidst rising liquidity crunch. “The markets that are bearing the brunt of the problem are the capital market and the money market and, to an extent, the foreign exchange market,” Chidambaram said.