As anticipated in our last newsletter, the fall in the rupee in August was shortlived, the US rate cut sent markets in a tizzy. But when America sneezed, central bankers around the world reached for their hankies. For the RBI, cutting rates would be a signal, unleashing more euphoria in a market that is already high on ecstasy. Lending rates are already dropping in the competitive loan market; banks need to survive. We therefore do not foresee a rate cut, though the CRR may be raised to check liquidity, if rupee management remains a concern. Keep in mind that the RBI is geared to ?respond promptly? to evolving situations - the October review date is not sacrosanct for a decision, which does make for increased uncertainty.

The global financial system is in a mess and this includes big banks like Merrill Lynch, Morgan Stanley, Citigroup?you would have thought they should have known better how to manage money. And then there?s credit card debt on the rise ? what Fortune magazine calls a 915 billion dollar bomb in consumer wallets. You have a housing market problem and a potential consumer spend problem in the US. Result? A very imminent recession has led to cuts in the interest rate by the Fed.

But other countries can?t follow suit yet. The same compulsion that kept the RBI from dropping rates here is showing up around the world ? that is, its expected impact in increasing inflation. Our inflation numbers look benign in part because fuel prices haven?t been allowed to go up, the underlying pressure won?t go away though. China raised fuel prices by 10 percent, the first time in 17 months. The European Central Bank is faced with tackling surging inflation, thanks to rising energy prices.

Where do we go from here? The Indian economy will continue to do well as the growth momentum is strong, but the economy is highly integrated now and international news is not good. At some point the negative international impulse will combine with underlying inflationary pressures, impact of high rupee value, and high interest rates. The large rises now will be followed by a large fall in the stock market ? when that will happen, we have no clue.

The credit policy has added an extra goal to monetary policy now - to be ready with all possible measures to respond to the unusual heightened global uncertainties and unusual policy responses from regulators abroad. This could mean curbs on foreign money inflows, but what would be more effective in the long run would be to see measures to direct funds towards infrastructure needs in the country. This of course requires more deregulation by the government. But letting go is tough so it?s difficult to expect much change here.