Better late than never

By mid-last week, the RBI’s no-show on lubricating the system with much-anticipated liquidity seemed somewhat inexplicable. So when it came up with a weekend surprise of rate cuts, it was better late than never. On Saturday, the repo rate — the RBI’s lending rate for banks — was cut to 7.5 per cent and the cash reserve ratio — deposits banks must keep with the RBI — to 5.5 per cent. The statutory liquidity ratio, the proportion of bank finance kept in government bonds, was also lowered. These salutary moves came on the heels of a nod to overseas borrowing by non-banking financial companies. The RBI had recently professed readiness to use unconventional means to handle liquidity problems, a part-admission that its earlier rate cuts needed a follow-up. With the interbank lending rate touching a high of 21 per cent on October 31, and ending the day at 13.55 per cent, renewed risk-aversion in banks was evident. Given RBI’s weekend package and with Punjab National Bank showing the way, all banks have been incentivised to cut lending rates. Downward revision of growth figures is a cause for worry. In August, the index of industrial production slid to 1.3 per cent, one of the poorest shows ever. Moving from inflationwatch to growth tracking makes sense, with inflation slipping to 10.68 per cent and expected to reach single digit by year-end, riding on falling crude and commodity prices. Another industryfriendly gesture the government has made of late has come in the form of a customs duty cut on aviation turbine fuel, which relieves some of the pressure on airlines deep in the red. Much of financing for big corporates comes from abroad. At a time of global financial crisis, domestic lenders will be sought. But liquidity shortage will obstruct any turnaround. Financing for small and medium enterprises and consumers is also tight. Lean business has social implications. An industry survey says that sectoral belt-tightening will impact jobs. Though the government denies this, job loss would be the logical result of continued industrial slide. The RBI has done well to act in concert with its counterparts elsewhere. The US Federal Reserve has repeatedly pruned its fund rate. China’s central bank cut rates thrice in six weeks. Bank of England and European Central Bank have also pitched in. India must continue to be in sync with global players since liquidity squeeze affects all today. Pushing growth being a shared panacea, not only must we bond with the global economy but also help it turn around.