One global fall-out of the sub-prime crisis in the US is a liquidity squeeze that central banks in the developed countries are attempting to counter by pumping liquidity into the system and reducing interest rates. This is indeed paradoxical, since the crisis in the first place was a result of an excessive build up of liquidity in the international system, leading to a synchronized boom in stock and real estate markets across the globe. Explaining the paradox requires understanding how the liquidity spiral occurs and how such liquidity is put to use by a liberalized and globalized financial system.

The Market Stabilization Scheme was launched in 2004 to sterilize the effects of foreign exchange reserve accumulation resulting from large capital inflows. While allowing the RBI to manage money supply in the face of an unprecedented surge in capital inflows, the scheme is increasing the interest burden the central government has to bear and reducing its fiscal maneuverability. It is time, therefore, to look to ways to regulate capital inflows rather than adapt to them argue C.P. Chandrasekhar and Jayati Ghosh.

At a time when reports of losses resulting from the subprime crisis are on the rise, a paradoxical surge in global stockmarkets is inducing an element of complacency. The worst is over, argue observers. C.P. Chandrasekhar and Jayati Ghosh take a longer view, and examine evidence on growth and volatility in the age of finance that suggests that the worst is perhaps not behind us.

Given that a substantial proportion of companies in Asian developing countries are either unlisted or have a small proportion of free-floating shares, the surge in investments by private equity firms suggests that foreign acquisitions could increase in the region sharply. With foreign investors controlling a rising share of total assets, the ability of domestic forces and the domestic State to influence the pattern and pace of growth of domestic economic activity would be substantially eroded.

All eyes are directed at the US housing market that has been afflicted with a meltdown in its sub-prime mortgage segment. With housing asset values having driven the US economy, which in turn serves as locomotive for the rest of the world, fears are that this American disease could trigger a global slowdown. The assumption is that the original problem is quintessentially American. If it is not, the authors argue, the US experience can have other lessons for countries like India.

The sharp stock market correction of April 2nd was in reaction to the RBI’s unexpected attempts towards immediate price stabilisation. Unfortunately, the response to inflation that has been the result of unbalanced sectoral growth in the economy has to be such measures, which would adversely affect the pace of growth and the returns from speculation. However, the RBI has no option but to rein in the rapid growth of liquidity resulting from the sharp increase in foreign capital inflows into the economy, especially the stock markets.

Continuing with the discussion on Basel II and India's banking structure, the authors argue that using external ratings to decide the appropriate risk-weights to assess capital adequacy inevitably leads banks to decide their lending patterns based on pure profit considerations. This makes it difficult to simultaneously implement a banking policy that seeks to direct a proportion of lending to specified sectors for meeting growth and equity objectives.

Despite the postponement of the target dates for banks to implement the Basel II guidelines, adjustments aimed at realizing that goal are underway. In this and the following article, the authors examine what the guidelines involve, their effects on banking structure and behaviour and some likely outcomes of implementing them.

As the euphoria over the acquisition of Anglo-Dutch steel major Corus by the Tata group being a ''national'' victory wanes, the question that would remain is whether the price offered to clinch the deal is too high for comfort. This concern is real despite the fact that Tata hopes to rely on its advantages as an integrated steel producer.

The stock market in Thailand collapsed after the government introduced limited market-based capital controls aimed at stalling the rapid appreciation of the Thai baht. The subsequent retreat by the government on the capital control measures raises serious questions about policy sovereignty in developing countries that have opened their financial markets to portfolio capital flows.

The declared aims of the Planning Commission's Approach to the XIth Plan, all of which require substantially increased public expenditure in physical infrastructure and social sectors, simply cannot be met within the confines of a restrictive fiscal policy stance. The need to rethink policies of resource generation and financial regulation is therefore urgent. In this context, this paper, presented to the National Commission on Enterprises in the Informal Sector, seeks to examine the effects of the three perceptions underlying the prevailing fiscal conservatism, questions their validity and offers some alternatives for mobilising resources for development.

The mere creation of the much hailed Special Economic Zones would not necessarily change the trajectory of export growth from India by attracting exporting units, though it may increase production for the domestic market by large firms and transnationals with adverse implications for existing domestic producers. This will pave the way for a crude form of primitive accumulation of capital where private capital would make huge profits at the expense of the small property owner and the State, with limited benefits in the form of foreign exchange revenues.