On balance

Monday markets were optimistic in India. That would seem to suggest investors have received satisfactory answers to the first two of their three big questions: will liquidity improve, how sound are India8217;s banks, and what more awaits the world in the American-European financial crisis? Even if markets had not responded positively, the answers to the first two questions wouldn8217;t have changed. Liquidity is now clearly a top priority for RBI and government. A flurry of official statements over the weekend has confirmed that. The committee set up under Arun Ramanathan, finance secretary, may come up with more suggestions. Or RBI may not wait for its recommendations if the situation demands more immediate action. As for banks8217; health, those betting on rumours, malicious or otherwise, to push ICICI to a crisis zone have lost their bets, at least for now. Repeated assurances by the bank, including direct communication with depositors, and authoritative certificates of health from RBI and the finance ministry have done the trick. Instructively, as the Sensex rose in early morning trade in Monday so did ICICI8217;s stock. To sum up, there8217;s official recognition that the financial system will not be allowed to run dry and there8217;s abundant evidence that there8217;s no systemic risk in the banking system. So let8217;s stop wanting to ban things or introduce unnecessary regulation.

The third question 8212; where will the American/European financial crisis go next 8212; is of course in the category of unknown unknowns right now. State support, state guarantees, not only of deposits but debts and inter-bank transactions, coordinated action, etc, cheered Asian and European markets and pushed US stock futures 8212; bets on where the US market will go once in opens 8212; up. It could be that the trillions of dollars now promised and some of which is already being infused, in Britain, for example, will stop anxiety feeding on anxiety. On the other hand another big financial firm announcing its near-demise could turn sentiments. Much also depends on whether the US takes direct stakes in financial firms 8212; markets want that. India is a news-taker on this front. Bad global news may require some domestic intervention if the mood turns really panicky. Otherwise, official energies should be on, apart from the short-term liquidity problem, the medium term economy problem.

Growth prospects are not good locally and while some amount of slowdown is inevitable, early policy changes can make a considerable difference. Clearly, RBI is now fully engaged on the interest rate issue. There may be some indications on this relatively soon. Structural reforms at a time of slowing tempo are great mood enhancers and, more, they do the ground work of a better recovery when the business cycle turns. As politicians start writing electoral futures contracts, that8217;s what they should remember.