Monday markets were optimistic in India. That would seem to suggest investors have received satisfactory answers to the first two of their three big questions: will liquidity improve, how sound are India’s banks, and what more awaits the world in the American-European financial crisis? Even if markets had not responded positively, the answers to the first two questions wouldn’t have changed. Liquidity is now clearly a top priority for RBI and government. A flurry of official statements over the weekend has confirmed that. The committee set up under Arun Ramanathan, finance secretary, may come up with more suggestions. Or RBI may not wait for its recommendations if the situation demands more immediate action. As for banks’ health, those betting on rumours, malicious or otherwise, to push ICICI to a crisis zone have lost their bets, at least for now. Repeated assurances by the bank, including direct communication with depositors, and authoritative certificates of health from RBI and the finance ministry have done the trick. Instructively, as the Sensex rose in early morning trade in Monday so did ICICI’s stock. To sum up, there’s official recognition that the financial system will not be allowed to run dry and there’s abundant evidence that there’s no systemic risk in the banking system. So let’s stop wanting to ban things or introduce unnecessary regulation.

The third question — where will the American/European financial crisis go next — is of course in the category of unknown unknowns right now. State support, state guarantees, not only of deposits but debts and inter-bank transactions, coordinated action, etc, cheered Asian and European markets and pushed US stock futures — bets on where the US market will go once in opens — up. It could be that the trillions of dollars now promised and some of which is already being infused, in Britain, for example, will stop anxiety feeding on anxiety. On the other hand another big financial firm announcing its near-demise could turn sentiments. Much also depends on whether the US takes direct stakes in financial firms — markets want that. India is a news-taker on this front. Bad global news may require some domestic intervention if the mood turns really panicky. Otherwise, official energies should be on, apart from the short-term liquidity problem, the medium term economy problem.

... contd.