Tags:
Journalism of Courage
These are extraordinary times in the global economic order. In one bastion of Anglo-Saxon capitalism, Britain, the government has become part owner of some big banks to save them. In the other bastion, America, pressure is on to follow the British plan, the argument being that state involvement already planned — government buy-up of bad assets — isn’t enough. Continental Europeans, who were being sniffy about Anglo-Saxons’ “le capitalisme sauvage” a few days back, have been found to be hosting banks with more gluttonous appetite for risk than those in America. Who would have believed all this a year back, six months back? And there’ll almost certainly be more norm-busting responses as the crisis unwinds and real economies get affected. Should India bust some norms? Yes.
But let’s begin by noting that a healthy rate cut by RBI won’t be norm-busting. In today’s situation, it’s the norm. Four big central banks around the world cut rates on Wednesday. RBI knows better than anyone the following. First, despite encouragement to inflows, dollars won’t come to India now. Big industry in India is getting shut out of foreign funds because foreign credit is too pricey and there are fears about having costly loans on company books. Second, it is true Indian banks will lend more to big industry as the latter turns homewards to make up for overseas credit crunch. But this will shut out small and medium industry even more. Third, even the headline inflation rate is softening, globally commodity prices are lower, and in today’s environment yesterday’s flawed argument on inflation — it was curable by high interest rates — looks even more risible. Therefore, any time RBI cuts its key rates would not be too soon.
Norm-busting? RBI should seriously think of using India’s foreign exchange reserves to push up the rupee. Steep depreciation is complicating all calculations, including muting the domestic effects of lower global commodity prices. Using reserves this way will reduce liquidity but sensible economists have already pointed out that RBI’s market stabilisation bonds should be bought back to counter the effect. Also, the government may want to think of injecting capital in banks to increase their lending capacity. India’s over-conservative banking system is not at risk, so this looks like a strange idea. But forget the norms and recognise the risk of lower investment. Small drops in investment can have big growth impacts. Therefore, arming banks so that they can lend more is not a bad idea at all. What’s really a bad idea in these times is to do the usual things in small measures.
