The government's focus on the markets does not stop here. In recent years, monetary policy has also served to prop up the market, a tendency which has been strengthened by the latest credit policy announced at the end of April. There are three ways in which implicit support for the market has been provided. First, the Reserve Bank of India (RBI) has over the years increased the flexibility of the banking system to enter new areas and undertake investments of a kind that help capital market growth. The latest such "innovation" is the permission granted to banks to enter the insurance sector, despite their not-too-satisfactory performance in areas such as mutual funds and housing finance, which they had been permitted to diversify into in recent years.
 
Second, through repeated reductions in the Cash Reserve Ratio (CRR) required of banks, amounting to an overall 7 percentage points, liquidity in the system has been considerably enhanced, allowing market players easy access to funds, not just for warranted but also speculative investments. The recent credit policy has gone considerably further in enhancing liquidity available to the market players. In his statement making the announcement, RBI Governor Bimal Jalan promised to "maintain easy credit and (institute) a cut in CRR if required and if the inflation rate is down." Obviously, Jalan is concerned only about the likely inflation in the prices of commodities, and is not too concerned about the huge inflation in the prices of financial assets that had occurred before the recent downturn in the stock markets began.
 
In fact, the direction of monetary policy is such that it appears geared to supporting high asset prices. As one observer has put it: "The proposed Liquidity Adjustment Facility (LAF) to provide crunch funds for market players (and sometimes to drain the rushes), the reduction in the minimum daily requirement of CRR balances by banks from 85 per cent to 65 per cent, a special facility for securities settlement quite similar to an intra-d ay credit facility, a Debt Securities Clearing Corporation and the rest are all meant to keep the financial market amenable to the RBI's intentions."
 
Finally, over the reform years, especially in the recent past, interest paid on deposits with the banking system has been substantially reduced. The maximum rate of interest has fallen by as much as 3 percentage points. And to keep pace with this, the government has recently launched an effort to reduce interest rates on small saving schemes. This fall in interest rates serves to push small savers into mutual funds and debt and equity instruments, which offer or are expected to offer higher rates of return, helping to sustain demand in the market. The tax incentives being provided on investments in specific financial assets such as infrastructure bonds only further this tendency.
 
In sum, the combination of fiscal and monetary policies that are being put in place appear to have been formulated with one eye on the market. And inasmuch as the market has been passing through a speculative phase resulting in unsustainable price-earnings ratios, this effort to prop up the market amounts to support for speculative practices. The problem is that speculative activity tends to drive the market both ways, with the smaller investors rushing in when the market is buoyant and exiting, having burnt their fingers badly, when the market is in free fall. This exaggerates the movements of an index, which have been given undue significance as a pointer to the health of the economy under the current regime. Not surprisingly, the Finance Minister is not too comfortable with the wild swings in the index. He expressed his resentment when he declared in his reply to the budget debate: "The manner in which stock markets are behaving leaves much to be desired. It is very silly behaviour." What he left unsaid is that he himself has been silly enough to place all his bets on those very same markets.