Monday, January 21, 2008

The Sound of Crash (is deafening)

RBI Guv Dr.Y.V.Reddy has heard us... Or is it the deafening thud of yesterday's market crash? Here he’s going soft on interest rates as opposed to his earlier tough stance against inflation. Ila Patnaik had argued that lower interest rates would help arrest inflation and the Rupee run since India would become a less attractive destination for foreign funds.

That report quotes RBI view calling for end-use restrictions for investments by foreign VCFs because of concerns on foreign capital inflows it is finding tough to manage. Ila Patnaik’s worst fears have come true - the central bank has been absorbing foreign currency inflows to check the rupee’s appreciation, but has ended up adding to the liquidity in the system.

I quote from that BS article. “Abundant rupee liquidity poses risks of higher inflation as it adds to the already high money supply. The year-on-year increase in money supply (M3) as on January 4, 2008, was 22.4 per cent against 20.8 per cent a year earlier and much higher than the central banks target of 18 per cent.”

With a crash like that, I’d rather the Guv comes up with some good news of lower interest rates, weaker Rupee or anything to perk up the market on 29th Jan, when he reviews the credit policy - and resuscitate the annual non-event that it has become lately.

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