Time to either cut or run

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Moreover, with the ECB route being blocked for raising money for domestic investment, and with IPOs faltering, new investment has to turn more towards bank capital for financing. With banks facing uncertainty over the monetary policy framework, it will not take a lot for investment to turn downwards. Further, and perhaps most importantly, investment depends upon expectations. Expectations of tight monetary policy and lower demand can hit investment rates more sharply and quickly than one may be able to foresee. Once the momentum is lost, it may be difficult to regain it. It is, therefore, not a good idea to wait for an investment downturn before changing the stance of monetary policy.

In addition, it is important to acknowledge the changing pace of the economy’s globalisation. Today, if the global economy shifts, and signs of a US recession are only increasing by the day, it is inevitable that India will be affected. Data on the US housing market is getting worse. Now automobile sales data, too, shows a drop. ICICI Bank has shown losses from its overseas operations, traced directly to the subprime crises. We had heard of stories of stockmarket decoupling earlier. They have now been written off.

Today, we hear of stories of the real economy decoupling. These will soon be written off as well.

Further, as has been argued before, despite Dr Reddy’s naive faith in law-abiding citizens, it is unrealistic to think that closing a few doors is going to block foreign capital flows.

As long as the interest differential is high, Indians are going to bring money into India. With the RBI focused on preventing rupee appreciation, this means buying up huge amounts of dollars and pumping rupees into the system. Sterilisation of its foreign exchange intervention keeps interest rates high and keeps speculative capital coming into the country. Interest differentials are going up further. In the last few weeks, the US 3-month treasury bill rate has slipped to 1.9%, and so, the interest differential with the Indian treasury bill rate is more than 500 basis points.

If honest Indians have brothers living abroad who borrow money and send it home to put in fixed deposits, who can blame them?