The Reserve Bank of India has announced yet another set of much needed measures to boost liquidity and open up channels for credit flow. The RBI’s steps on improving liquidity in recent weeks constitute what have been perhaps the fastest responses from Indian policy-makers seen in recent years. Yet, as the situation unfolds, these may not be sufficient to help the economy adequately in coming months. There are seven issues that need urgent attention.

One, lower cost of credit. The RBI has done well in improving rupee liquidity and dollar liquidity. All levers should be applied towards ensuring that the local money market works well. Firms should feel confident about their ability to borrow large quantities of money at prevailing interest rates. Fears about a potential shortage of dollars should be forestalled well ahead of time. Capital controls should continue to be eased to allow firms to access dollars wherever available. Line of credit should be established with the US Fed, EXIM banks and multilateral agencies. Once call money rates stay stable and confidence in liquidity availability is restored, the RBI should cut both the repo and the reverse repo rates in line with the slower growth and lower inflation expected in the coming months. The RBI should not only be ahead of the curve, it should also be seen to be so.

Two, more transparency on reserves. RBI intervention and revaluation data should be published weekly along with the data for value for reserves. When the dollar, euro or yen rate changes, it leads to changes in the value of India’s reserves that are held in dollars and euros and yens, or revaluation. When the weekly data for reserves is published, there is a huge amount of guess work on the extent of RBI intervention and revaluation. If the market does not know what part of the decline in reserves is due to revaluation, there is a perception that all of it is due to RBI intervention. This leads to two fears: that the RBI is sucking rupees out of the market and soon liquidity will tighten again, and so banks cannot reduce lending rates; and that if reserves continue to decline at the rate of $10-15 billion a week, then in less than six months we could be hitting the bottom of the barrel. Publishing weekly data on revaluation and intervention will reduce misperceptions about the RBI’s actions.

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