Poisoned Chalice For Banks

At stake is a large amount of money. In 1995-96, incremental deposits with banks amounted to Rs 45,486 crore. Thus, banks have some Rs 2,274 crore of resources which can be ploughed into the secondary markets. This is roughly equivalent ($630 million) to three months purchases by the foreign institutional investors (FIIs). The temptation to channel this money to support a cause would be strong and that is precisely the reason why the possibility of its misuse cannot be discounted. Left to themselves, banks would be loath to dabble in the secondary markets. Apart from the risk of the losses involved, their lack of experience should put them off. Institutions flaunting an international funds management pedigree have made spectacular losses and their example should be enough to convince banks that the stock market is not childs play.

It can be no ones argument either that the additional funds imply greater liquidity in the markets and are therefore desirable. As government institutions learned to their discomfiture recently, their entry only provides an exit option for FIIs; liquidity on the whole remains the same. Above all, no amount of directed infusion of funds can change the course of the markets; the RBI should have known this and advised the finance ministry accordingly.