Quick fixing

As the the liquidity crisis continued, the RBI and government stepped in and responded to the situation. The government has responded by helping the banking system increase their equity capital. The RBI has responded by cutting the CRR by another 100 basis points to 6.5 per cent. This will help ease the tightness in the money market. In the days to come the RBI needs to continue thinking out of the box, maybe on an even bigger scale, to ensure liquidity for Indian firms in both rupees and dollars. The CRR should be cut further to 3 per cent. The operating procedures for monetary policy need to be substantially reformed so as to ensure that ample liquidity is available to a wide spectrum of financial firms. There is extreme urgency in rapidly responding to these problems: policy makers have only days and not weeks in coming out with the right answers.

As reality sank in 8212; a day after the euphoria of gigantic government support for financial markets worldwide 8212; there was, appropriately, a realisation that more steps are needed. There is now a sense that making these interventions work, and restoring financial markets to health, will be a difficult and slow process. Financial markets in the West continue to be jittery and big financial firms continue to mistrust each other. Economists in the West are already fretting about the dangers of government shareholding in financial firms; the goal now is to get finance to work and sell off those shares as soon as possible.

Policymakers in India need to respond to this crisis at three levels. First, the immediate task is that of putting finance back on its feet. In recent days, we have seen that the difficulties in the Indian money market are being rapidly addressed. Second, a supportive environment must be created by liberalising capital flows so as to ensure that ample equity and debt capital is available to Indian firms who will be negatively affected by the coming global slowdown. Third, special efforts need to be taken to get early warnings about insolvent financial firms and surgical procedures need to be applied to them well ahead of time.