The Government, RBI need to Act NOW

If there ever was a time when the government needed to overreact to a situation, it is now. The drying up of global liquidity after the bankruptcy of Lehman Brothers has hit financial markets across the board in India with astounding ferocity and speed.

And with that, market uncertainty has spiked to unprecedented levels; rarely have we seen the stock market change direction by 500 points or more in a day, these many number of times, in this short a time. In this environment of hyper-uncertainty, traders, investors and businesses are likely to have overreacted and prices of equity, bonds, foreign exchange have probably overshot their fair valuations.

To increase rupee liquidity cutting CRR to 5 per cent and SLR to 20 per cent, making oil and fertiliser bonds SLR-eligible, increasing the range of repo-eligible assets and even providing insurance against counterparty risk in interbank transactions is the key. To raise dollar liquidity in a predictable manner, setting up a weekly dollar-swap facility against rupee-denominated assets and investing part of the foreign exchange reserves in one-year deposits in foreign branches of Indian banks is the way to go.