Indian growth rates should continue to attract The short answer is no, since domestic drivers of growth are robust and varied. But the element of panic and herd reactions make crises uncertain creatures.
Whatever the earlier errors, policy reactions to the crisis itself have been largely correct, injecting liquidity, at a price, to prevent freezing of markets, helping institutions, such as Fanny Mae, Freddie Mac and AIG, whose collapse would have large externalities, but letting the shareholders and management suffer. Concerted action by a number of central banks to pump in liquidity is another good sign of global stakes in the financial system and a readiness to prevent its collapse. Liquidity injections need not be inflationary, they substitute for a drying up of systemic liquidity and can be withdrawn as the latter revives. Plans to help banks clean out illiquid assets and restrictions on short selling to restrict attacks on vulnerable stocks may end the uncertainty about who is next. Tackling the root cause may prevent periodic eruptions from the festering sores of the subprime crisis. Policy has to be interventionist in such a crisis to minimise contagion and collapse. Tightening regulatory loopholes that helped create excessive financial leverage must follow, but later. Since taxpayer money is going to investment banks, they must accept tighter regulation. They can only survive as regular banks. Incentives must be redesigned, current huge bonuses in good times and limited liability in bad encourage risk-taking. A premium could be paid in good times to finance the risk of future bailouts. Since Indian banks are healthy, with little exposure to the derivatives and institutions at risk, they will be all right. Fall in global commodity prices will help reduce imported inflation and allow policy to revive growth. There will be a drying of international liquidity and outflow from troubled FPIs. But Indian growth rates are one of the few bright spots in a dismal situation, and should continue to attract robust long-term investments. Excessive FPI inflows were a problem for policy in the past year. The reversal is still minor compared to past accumulations. So there should not be any hesitation to allow some reduction in forex reserves. The cost of carrying reserves and of sterilisation will be reduced. Selling the dollar when the rupee is low makes good profit for the Reserve Bank. As long as inflation is still high excessive rupee depreciation should be prevented. The liquidity withdrawn by dollar sale can be countered by unwinding MSS balances and reducing CRR. The latter will reduce bank costs, and allow domestic credit to compensate to some extent for the drying of international credit. Domestic savings are high enough to finance investment, with whatever external help remains. Sectors most at risk are those that have dealings with troubled financial companies. Some Indian professionals will loose jobs. But quick restructuring makes these losses short-lived. Talent becomes available to go into areas where it is scarce. A deeper global recession may not adversely affect the outsourcing business, despite the loss of some big clients, because of the search for cheaper alternatives. Air travel loses some of its frequent flyers but gains from lower fuel prices. There are always pluses and minuses, it is up to us to build on the pluses and provide an alternative growth pole for the world. The problem is the increasing indebtedness of the United States government. But at least in the short-term, surpluses of other countries should continue to shore it up, because of the latter's stake in the global system. Gradual adjustment away from the dollar towards a less unipolar and therefore more robust global system will, however, continue. -- Visit site at – http://investorline.co.in/ Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ Investor Forums- http://forums.investorline.co.in/ Iwebs Open Source Web Publishing Platform - http://webs.investorline.co.in/iwebs/ --~--~---------~--~----~------------~-------~--~----~ Get latest market updates & search internet right from your browser-download our toolbar here- http://investorline.ourtoolbar.com/ Visit our site at – http://investorline.co.in/ Newsroom: http://newsroom.investorline.co.in/ Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ Investor Journal - http://research.investorline.co.in/ Newscatcher- http://catcher.investorline.co.in/ Interested in Financial Planning-Let us Contact you- http://spreadsheets.google.com/viewform?key=pb_z4f1_zGMg4iBBFT3-SWQ&email=true If you like the site then promote it here- https://www.freetellafriend.com/tell/?url=http://investorline.co.in/blogs/news Create your own free blog on- http://investorline.co.in/blogger Visit this group at http://groups.google.com/group/india-investor -~----------~----~----~----~------~----~------~--~---
