Opinion | An out-of-the-box solution for India’s stimulus problem
Pledging shares would let the Centre finance a ₹10 trillion fiscal stimulus without having to court risks
In October 2008, the Reserve Bank of India (RBI) announced a backstop facility to help mutual funds (MFs) survive redemption pressure. Panicky investors selling MF units caused its net asset value to plummet, reinforcing the panic and selling. The backstop gave them indirect liquidity support. Its mere announcement calmed nerves and the redemption pressure eased. The facility never had to be used, since MFs had adequate liquidity to cater to moderate levels of redemption. Indeed, India survived the Lehman crash and mortgage crisis in North America. Never mind that the accompanying fiscal stimulus of 2009 proved excessive and lasted much longer than desired, leaving behind high inflation, made worse by the currency tantrums of 2013.