Is it a plane? Is it a bird? No, it’s the RBI
With the intensification of the global financial crisis — manifested in the free fall in the Sensex and the rupee — the Reserve Bank of India (RBI) is stepping in to contain the fallout.india Updated: Oct 08, 2008 21:58 IST
With the intensification of the global financial crisis — manifested in the free fall in the Sensex and the rupee — the Reserve Bank of India (RBI) is stepping in to contain the fallout. For the first time since June 2003, the central bank cut the Cash Reserve Ratio (CRR) that determines the amount of cash that banks park with it. This move will inject Rs 20,000 crore of liquidity into the system and facilitate more lending. To revive the flagging interest of foreign institutional investors (FIIs), the Securities and Exchange Board of India (Sebi) has also removed a host of curbs on indirect investments by FIIs such as participatory notes where the underlying asset is a stock or derivative instrument listed on the stock exchanges. But how effective are such measures?
The CRR cut is purely a temporary measure and hardly presages lower lending rates. It would also be premature to infer a change in the RBI’s stance that still wants to keep inflation under check. Portfolio investments have plunged as a consequence of the global meltdown. Will removing the ban on participatory notes boost our flagging bourses? Unlikely. As their ultimate beneficiary is not known, it will perhaps encourage round-tripping as rich domestic residents who have salted their funds abroad can bring back their money through this route. This is why the RBI had earlier recommended a ban on such instruments.
However, what is to be welcomed is the greater activism on the part of regulators to coordinate their interventions. Recently, a high-level coordination committee on financial markets, comprising the RBI, Sebi, insurance, and pension fund regulators, and Finance Ministry mandarins reviewed market developments in the wake of the global turmoil. The RBI is also asking banks to furnish data on their exposure to Wachovia Corp, Lehman Brothers and others — besides conducting an audit of ICICI, the country’s largest private sector bank. Such moves will certainly help India to deal with the emerging market situation as best as it can.