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Needed Leadership

Omkar Goswami

I suddenly remembered a scene from the Academy Award winning film ‘Patton’. General George Patton, played by George C. Scott, has been pulled out of the doghouse, given charge of the US Third Army in France, and ordered to make a lightning fast push to the Rhine. Patton commands like a man possessed, and his armoured corps move at a lightning pace, leaving a destroyed German army in its wake.

Suddenly, everything stalls in the muddy rains of autumn. While reconnoitring the front-line, Patton discovers why. It is a god-awful traffic jam with huge convoys on all sides of a muddy square, where troopers and tankers brawling are with each other for the right of way. Patton jumps off the jeep, hoists himself on a jerry can and becomes the traffic cop, with a cigar clenched in his mouth and the riding crop in his hand — cajoling and screaming, “Go, baby, go!” Soon, a semblance of order emerges and tanks and armoured cars rumble ahead, one vehicle at a time.

We need a “Go, baby, go!” intervention like never before. Between January 2008 and now, the Sensex has fallen by over 50 per cent, with a 14 per cent fall in four trading days of the week ending 10 October. The Sensex isn’t. The Dow Jones Industrial crashed by over 20 per cent between 1 October and 10 October; the FTSE-100 by over 15 per cent; the Nikkei by 27 per cent; the Hang Seng by 20 per cent between; and the Singapore Strait Times Index by over 18 per cent. By the time you read this, it could be worse.

There is no liquidity. Terrified investors are selling stocks and moving to cash. Its not only the foreign institutional investors (FIIs) who are scared out of their wits. Banks everywhere are refusing to lend, and Indian banks are no exception. In India, the inter-bank call money rates quote between 25 per cent and 19 per cent.

What’s a “Go, baby, go!” response? Here are some things we must do.

First, sharply cut the cash reserve ratio (CRR). With respect to the RBI, the 150 basis points cut won’t be enough. We need to quickly cut it by another 150 bps to 6 per cent — namely, to where it was in April 2007. And to keep the powder dry for yet another cut, if needed.

Second, we must reduce the repo and reverse repo rate by 200 basis points to 7 per cent, and do so all at once, instead of the usual 50 bps per shot. With the possibility of having one more cut up its sleeve, if the situation so demands.

Third, the RBI should immediately allow money market mutual funds to access the repo window. There will be significant mutual fund redemption pressures over the next few weeks. The RBI needs to alleviate this by allowing money market mutual funds to access money at repo rates.

Fourth, cut the Statutory Liquidity Ratio (SLR) floor to 15 per cent instead of the current 25 per cent. This may not immediately induce banks to lend more. But it will send a clear signal that the RBI is determined to fire on all cylinders to save the economy.

Fifth, immediately set up a sovereign fund with a kitty of $ 25 billion to support the equity of well run Indian listed companies and mutual funds. The LIC or the State Bank of India can administer the fund. As the FIIs sell, this fund can buy. Given the current price-earning ratios, and good profitability of the better run companies, most of these investments will earn healthy profits in a year or two.

Sixth, recognise that supporting the rupee without making proactive, big-ticket interventions is counterproductive — for all it does is suck out liquidity to no avail. Concerted, big-move interventions will instil much greater confidence in the financial system which, in turn, will ease the pressure on the downward spiralling exchange rate.

Seventh, realise that inflation is coming down. The global meltdown has forced most commodity prices to crash; crude oil prices are in the $ 80 range, unthinkable six months ago; food prices have come down; and manufacturers are in no position to charge higher prices. We can’t let the fear of an inflation that is already on its way south to seriously impinge on growth.

Published: Business Standard, October 2008


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