Markets allowed to absorb earlier interventions

MID-TERM MONETARY POLICY 2008-09/ VIEWPOINT

Since Dr Subbarao took over as Governor of the Reserve Bank of India (RBI) on September 5, there have been frequent monetary policy announcements. Last Monday, the repo rate cut was implemented and its quantum took most people by surprise.

Given the substantial measures taken during the past few weeks to inject liquidity into the system, to address specific requirements of players like liquid mutual funds and, finally, to provide a growth stimulus by cutting the repo rate, one could not have realistically expected any significant policy changes in today's quarterly announcement. From this perspective, the absence of any major policy actions should not come as a surprise.

 

There is still enormous turbulence in the global system and Indian markets are being driven by this instability far more than by any domestic factors. At the present moment, global factors are so dominant that no realistic domestic actions can offset them. There is not much point in going overboard with liquidity and interest rate stimuli.

Indeed, huge amounts of liquidity that central banks around the world have been pumping into the system, including in India, will result in growth stimulus. Significantly, the monetary stimulus is being supported in an increasing number of countries with fiscal measures, which will help arrest the slowdown in growth.

However, financial markets need to recognise this and assure themselves that there is a real possibility of a turnaround. Until they do this, it is critical that policy-makers do everything they can to raise confidence levels. But, they also need to keep something up their sleeves to provide the needed boost when the time is right. Perhaps the absence of any tangible actions in this policy, I hope, points to such reservation of policy instruments for when needed.

R Ravimohan, MD & Regional Head of Standard & Poor’s, South and Southeast Asia