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
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
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