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Now is the time to act fast, and go big

business Updated: Oct 11, 2008 08:42 IST
Rajesh Mahapatra
Rajesh Mahapatra
Hindustan Times
Highlight Story

It’s not just about the bulls and bears anymore. It’s about India. And it’s hurting.

On Friday, as markets around the world fell like a pack of cards amid deepening fears of a global recession more evidence surfaced back home to show India too was taking a hit bigger than expected.

The impact of the global financial turmoil that was, so far, limited to the stock market and a couple other export-centric businesses now appears to be cascading into the real economy.

And cascading so fast that policymakers in the country have no option but to go on a war footing – because, left to fester, this could derail the India story. See graphics.

Now is the time to act fast, and act big, even if it means measures that may meet political resistance, including such cuts in interest rates that risk higher inflation.

After posturing for long, authorities are beginning to respond.

The Reserve Bank of India on Friday announced a surprise one-percentage point cut in reserve requirement of commercial banks so as to leave more money in the system and Finance Minister P. Chidambaram promised to boost liquidity further through increased government spending.

But news that industrial growth plunged to 1.3 per cent in August, the lowest in a decade, coupled with fresh jitters from world markets, overshadowed the measures from RBI and words of assurances from the finance minister.

The BSE’s 30-share Sensex plunged 800 points, 7.07 per cent to close at 10528, lowest since July 2006. “There is a crisis of confidence,” said Surjit Bhalla.

What began as a housing bubble going bust in the US has since made banks and FIs, which pumped billions of dollars into real estate and lost heavily, suspicious of each other and stop lending among them.

This, in turn, has resulted in a liquidity squeeze across the global financial system. Banks, including in India, are going short on money to lend, let alone reduce interest rates to encourage investment and spending that spur growth. Central banks worldwide are pumping money to ease the situation.

To India’s credit, controls on capital flows and banking transactions have insulated the country from the kind of turmoil that financial firms are facing elsewhere.

There have been some rumours about ICICI Bank, which had exposure in some of the firms in US that went bankrupt, but Chidambaram said: “our banks are well capitalised, they are well regulated. There is no need to worry about deposits.”

The RBI’s decision to reduce cash reserve ratio – the share of deposits that commercial banks must hold in cash with the central bank – would release about Rs 60,000 crore into the system, effective Saturday.

But experts feel this would neither help restore confidence nor enable banks to reduce lending rates.

“What is necessary to bring back confidence is at least a 100 basis point (1 percentage point) cut in the repo rate and another 150-200 basis point cut in CRR,” Bhalla said. The government on Friday set up a panel under Finance Secretary Arun Ramanathan to assess the situation and advise the government.

“We will take steps to infuse liquidity because we recognise that the flow of credit smoothly and efficiently through the system is vital to the stability of the financial system,” Chidambaram told CNBC TV18 from Washington, where he was to attend the annual meeting of the World Bank and International Monetary Fund. He has cut short his visit according to news agency PTI and is returning home.

The Fund-Bank meeting is expected to hammer out an action plan to help the global economy tide over the current crisis, which has wreaked havoc in the US and several other advanced economies.