The Indian financial markets experienced their own Black Friday with the Bombay Sensitive Index experiencing its third worst drop in a single day and the dollar exchange rate breaking the Rs 50 barrier.
New Delhi will, with reason, blame a general negative sentiment across the world regarding emerging markets. However, the Reserve Bank of India (RBI) cannot escape blame given the tepidity of its mid-term annual monetary review. The Finance ministry will argue there was no need for any radical moves in the review as the government has infused Rs 185,000 crore of liquidity into the system this month alone.
This is to miss the point: at times of economic volatility, policymakers need to go beyond textbook responses and enter the psychological realm of managing market expectations. The market expected a reduction in key interest rates and was startled when these failed to materialise. Shocks to an ailing system are exactly what the doctor did not order. Credibility takes years to accumulate but can be consumed in a matter of weeks. This is doubly true in finance. Sadly, the finance ministry and RBI have frittered away much credibility by enacting piecemeal policies and embellishing them with set speeches. One has only to consider how the RBI began crisis-fighting with three successive cash reserve ratio cuts, losing the impact one large cut would have had and leaving an impression of indecision. Unsurprisingly those cuts and their successors have produced only temporary surges in the markets.
Prime Minister Manmohan Singh now needs to become far more vocal in enunciating policy. New Delhi must indicate it is no longer inflation fighting. Among the policies that should be placed under consideration are interest rate hikes, a nuts and bolts rollout of infrastructure projects that can actually be done and a crystal clear explanation of how the country will handle the surging dollar demand. Specific proposals to shore up rumour-hit sectors like real estate could also be tossed into the mix. What is needed is sweeping and decisive action. The purpose should be to generate a countershock of reassurance, to seek to make “sound fundamentals” a popular mindset rather than just a statistical conclusion.
{{/usCountry}}Prime Minister Manmohan Singh now needs to become far more vocal in enunciating policy. New Delhi must indicate it is no longer inflation fighting. Among the policies that should be placed under consideration are interest rate hikes, a nuts and bolts rollout of infrastructure projects that can actually be done and a crystal clear explanation of how the country will handle the surging dollar demand. Specific proposals to shore up rumour-hit sectors like real estate could also be tossed into the mix. What is needed is sweeping and decisive action. The purpose should be to generate a countershock of reassurance, to seek to make “sound fundamentals” a popular mindset rather than just a statistical conclusion.
{{/usCountry}}