Monetary policy stance needs more easing

The international financial crisis that surfaced about a month ago
has affected even developing countries like India. Initially it was
felt that the direct impact of the global meltdown on the Indian economy
would be minimal. However, recently it has been acknowledged that India
has also been affected by the crisis as it can not entirely decouple
from the US and Europe.

The Reserve Bank of India (RBI) has certainly done much to limit the
fall-out. It has adhered to liquidity modulation through flexible use
of a combination of monetary instruments, particularly, reduction in
cash reserve ratio (CRR) by 2.5%, with effect from October 11, 2008,
releasing approximately Rs 100,000 crore into the banking system.

On October 20, 2008 it also lowered the repo rate from 9% to 8%, primarily
to lower cost of funds to the banks so as to help investors to take
forward their investment plans. The bank has also increased the limit
on external commercial borrowings for Indian companies and raised the
interest rate ceiling on NRI deposits. Further, it released Rs 25,000
crore under the farm loan waiver scheme to add further liquidity.

However, much more needs to be done by the RBI to revive the market
sentiment and to reassure investors that it would not desist from making
serious interventions if the situation so demands. For this, CRR needs
to be further reduced by at least 1%. This would infuse liquidity in
the system and ensure sufficient availability of funds at reasonable
cost.

Secondly, the RBI should reduce repo rate by 100 basis points to 7%.
Similarly, SLR should be relaxed by 0.5%. Foreign exchange reserves
of $274 billion should be utilised partly to fund infrastructure projects.
The government should also seriously consider announcing the voluntary
disclosure of income scheme (VDIS), to bring additional money into circulation.

The RBI has been generally pro-active to maintain stability in the
financial sector as well as the real economy. However, there is a clear
case for a rate cut and for paying extra attention to meet the credit
needs of industry, especially the SME sector. Extra effort is required
to maintain the momentum of growth. And the time to do so is now.