Reserve Money: A Tale of Two Countries post Lehman-event

Many market observers are surprised by the sustained increase in stock values across the globe since the lows hit in early March 2009.
At the same time, many Indian analysts are wondering why the credit cost to mid-sized corporate is not budging even after the significant rate cuts by RBI.
A partial answer to both the queries can be found in the development of reserve money in the USA and in India since Sept 2008 till date.
I produce below two very interesting charts, sourced from data provided by the Fed and the RBI.
First the growth in Reserve Money in USA, in % change yoy,


Note that the growth rate moved up from low single digits to more than 100% post Lehman.
Now, look at the growth in Reserve Money in India, in % change yoy,
Note that the growth rate moved down from 25% to less than 5% post Lehman.
This distinctly different path of Reserve Money has deep implications on how the two central banks will respond to ongoing crisis in the medium term, and more importantly, how the relative asset prices will move in the near future in India when compared with USA.

What is the logic of Market Stabilisation Scheme Balances as of 31st March 2009?

I have been following the Reserve Bank of India (RBI) since 1991. From late 1990s, I can count on my fingertip a few occasions where I could not understand the logic of monetary or regulatory moves of RBI. I sincerely believe that for last one decade RBI is one of the best Central Bank’s in the world.
However, the latest action of RBI on Market Stabilisation Scheme (MSS) fails any tests of logic and propriety. RBI announced yesterday that it had refrained from de-sequestering MSS worth Rs. 330 billion and the closing balance of MSS as of 31st March 2009 (year-end for Indian Government, but not for RBI, which follows June year end) was Rs. 888 billion.
Many of the readers may be aware that MSS costs significant money for Indian taxpayers. I estimate the cost of current balance of MSS at Rs. 65 billion per annum, or around Rs. 60 per Indian per annum. Given that around 40% of Indians live on less than $1.25 per day, RBI is snatching away one day’s bread from around 40% of our population.
Does RBI have a strong reason to snatch one day’s bread from our poorest brethren? I believe not. Why do I say that?
Lets look at the reason d’être for conceiving MSS:
RBI announced MSS on 23 Feb 2004, with the following logic:
“…the intention of introducing MSS is essentially to differentiate the liquidity absorption of a more enduring nature by way of sterilisation from the day-to-day normal liquidity management operations. The total absorption of liquidity from the system by the Reserve Bank will continue to be in line with the monetary policy stance from time to time” ( emphasis mine)
My question to RBI is why we need to have “liquidity absorption of a more enduring nature” to the tune of INR 888 billion, when:
1. WPI is near zero for last one year, with no sign of inflationary pressure for next six months at least
2. CPI is near zero, in my estimate, in the second half of FY09 (Oct 08 to Mar09)
3. Asset prices are experiencing strong downward trend
4. Unemployment is increasing across entire India, and across all sectors
5. Exports are experiencing 20% or more fall
6. Reserve Money growth is around zero for last one year
Also, the monetary policy of RBI has been extremely easy since Oct 2008, which demands an explanation as to how can the current levels of MSS balances be explained by “the monetary policy stance”.
Finally, RBI on 31st March 2009, gave the following reason for refraining from de-sequestering MSS:
“In view of its comfortable cash position, the Government of India (GOI), in consultation with the Reserve Bank of India, have now decided not to transfer the balance amount of Rs.33,000 crore from the MSS cash account to the normal cash account of the Government of India in the current fiscal year…”
Clearly, if the genesis of MSS was not in level of cash balances of GOI with RBI, then its demise should not be linked to the levels of cash balances of GOI.
If RBI does not de-sequester the entire amount of MSS outstanding before starting the market borrowings on behalf of GOI for FY10 (April09 to March10), then it would be doing a great disservice to the citizens of this country, as the current balances of MSS have no basis for existence in the current monitory policy regime.

I still believe RBI is the best Central Bank in the world, and it actions in near future will either correct this anamoly or provider solid reason for its current (in)action.