Credit Policy may define regulatory roles

CHENNAI, MAY 17. The annual Credit Policy will be presented tomorrow by the Reserve Bank of India. At least two factors make this policy statement challenging. After the electoral verdict a new Government has not yet been formed and although there is no bar in going ahead, the central bank will still be cramped. It has been customary to dovetail monetary objectives with the larger economic agenda. The second factor that will overshadow practically everything else will be the stock market crash, not just the market meltdown but also the fact that it has allegedly been caused by political statements. The regulatory tasks become extremely daunting in these unprecedented times. Today's developments may only be a sample of what is in store. While trying to set right market apprehensions over the new Government's stance on capital market, Manmohan Singh, the architect of the common minimum programme and widely tipped to be the new Finance Minister, said that it is the responsibility of the capital market regulator, Securities and Exchange Board of India, to monitor the capital market. Dr. Singh was only partially successful. The indices recovered from their historic lows but ended the day sharply lower than last week's close. The Sensex lost 565 points and the Nifty 194, declines truly momentous even though they appear better that the morning's precipitous circuit-breaking falls. At that time the Sensex had lost 786 points and the Nifty 276 points. The causes for such a violent reaction are still being discussed but no one disputes the fact that some premature anti-reform statements made by the Communist parties triggered the unprecedented falls. The key question for tomorrow is how to arrest further falls and restore to the markets a semblance of stability if not normalcy? Normal days seem so far off amidst the unprecedented crash. However the fact that politicians of all hues, those within as well as key members of the outgoing government, have joined together to quieten the market is a plus factor. The SEBI says that it has been on full alert what this has meant in practice remains to be seen. When the dust settles down it will surely be the market's structural weaknesses that will come under focus and not just the specific actions of an investor or intermediary. But if past record is anything to go by it is likely that the SEBI will pin responsibility on a few large institutions that might have forced the pace and liquidated their holdings in an already nervous market. Another weakness is seen in the futures and options segment. These were meant to be hedging avenues but sadly have proved as volatile as the cash segment. The RBI stepped in during the day with a promise of abundant liquidity to banks to meet their intra day settlements. Inevitably as the stock markets crashed the rupee came under pressure. Institutional investors from abroad are repatriating their proceeds back. The RBI, in a statement today, says that it will continue to sell dollars to augment dollar supplies or even intervene directly. and addressing FIIs directly, the central bank says that while "they will no doubt continue to take their decision in regard to reducing or increasing their stakes in Indian equity markets,'' it will continue to ensure that they get the necessary foreign exchange. A taskforce has been constituted under Executive Director, Financial Market Committee, to monitor stock and other financial markets and provide liquidity wherever needed.