Difficult times

The coordinated policy rate cut by the Federal Reserve, the European Central Bank and the Bank of England is a positive step. It is now clear that the US sub-prime housing crisis is spreading to the world. As the banking crisis spreads to Europe, it appears that no part of the world will be untouched. The action taken by the US Fed and in Europe have not, until now, been adequate in removing fear from the minds of investors. As the fear factor dominates and entities do not feel safe lending to each other, money markets are drying up and a global liquidity crunch is developing. However, it is important to minimise the impact of the crisis on the real economy. The strategy for bringing back financial stability should be on the top of the agenda of any policy-maker. This, in the present crisis cannot be implemented by a single country alone. Further coordinated action may be necessary to bring order back to markets.

Today the crisis is concentrated in financial markets, while production and employement are showing signs of slowing down. The next stage may be when the real sectors start seeing greater difficulties. The world economy as a whole may witness greater stress. Under such conditions international coordination would remain equally important. At such a stage countries like India and China should be made part of the coordination process. Indian financial markets have clearly not been insulated from the crisis. Recent days have seen very sharp volatility in both the stock and the foreign exchange markets. While Indian policy-makers have to respond with sensible policies, there are no magic pills. It is important to understand that when the world is going through a crisis India will be affected. It is par for the course. Globalisation has brought us riches, and when there is a crisis of such dimensions as this one, it will bring trouble.

Recent instances of tight liquidity have been met with a much needed cut in the cash reserve ratio. This may not be enough. Under normal conditions policy-makers may have a lot to worry about and legitimate concerns such as inflation may induce caution. However, at a time like this it is important to act quickly and decisively. Until now policy-makers have shown the courage to do so. This must continue. The times ahead may be difficult and forward-looking leadership can play an important role in minimising the impact of the crisis on India.