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Monetary policy stance needs more easing
Monday, Oct 27, 2008

The international financial crisis that surfaced about a month ago has affected even developing countries like India. Initially it was felt that the direct impact of the global meltdown on the Indian economy would be minimal. However, recently it has been acknowledged that India has also been affected by the crisis as it can not entirely decouple from the US and Europe.

The Reserve Bank of India (RBI) has certainly done much to limit the fall-out. It has adhered to liquidity modulation through flexible use of a combination of monetary instruments, particularly, reduction in cash reserve ratio (CRR) by 2.5%, with effect from October 11, 2008, releasing approximately Rs 100,000 crore into the banking system.

On October 20, 2008 it also lowered the repo rate from 9% to 8%, primarily to lower cost of funds to the banks so as to help investors to take forward their investment plans. The bank has also increased the limit on external commercial borrowings for Indian companies and raised the interest rate ceiling on NRI deposits. Further, it released Rs 25,000 crore under the farm loan waiver scheme to add further liquidity.

However, much more needs to be done by the RBI to revive the market sentiment and to reassure investors that it would not desist from making serious interventions if the situation so demands. For this, CRR needs to be further reduced by at least 1%. This would infuse liquidity in the system and ensure sufficient availability of funds at reasonable cost.

Secondly, the RBI should reduce repo rate by 100 basis points to 7%. Similarly, SLR should be relaxed by 0.5%. Foreign exchange reserves of $274 billion should be utilised partly to fund infrastructure projects. The government should also seriously consider announcing the voluntary disclosure of income scheme (VDIS), to bring additional money into circulation.

The RBI has been generally pro-active to maintain stability in the financial sector as well as the real economy. However, there is a clear case for a rate cut and for paying extra attention to meet the credit needs of industry, especially the SME sector. Extra effort is required to maintain the momentum of growth. And the time to do so is now.

 

 

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