Effects of apex banks pumping in too much liquidity?

I think, the slowing world economy has also significantly increased the inflationary expectations, thereby permitting considerable easing of monetary policy. The last few months have, therefore, seen an extraordinarily heavy dose of fiscal stimulus packages and pumping of large sums of money into the system at reduced interest rates. There has also been an attempt to coordinate monetary policy actions across different countries. Can easing liquidity stoke inflation?I believe it is highly improbable as the current round of monetary easing accompanies a recession. The speed with which the crisis is unfolding can be gauged from the fact that just within a month the IMF has cut its global growth forecast for 2009 from 3% to 2.2%. With advanced economies now projected to be in recession in 2009, the growth scenario in emerging Asia too is seen to be less positive than was expected earlier.

I believe that the impact of the global financial crisis has actually affected the real economy. The odds of a rich-world recession are near-certain and emerging markets —which looked at the industrialised world’s financial turmoil from a distance for much of the past year has also been affected in a significant way.

With commodity prices falling sharply, concerns about inflation are increasingly giving room to fears about deflation. Consumers and investors have lost confidence — and this may lead to a  weakening demand and falling prices. This will be particularly catastrophic for economies with high levels of debt (the real value of the debt grows as prices fall). In fact, developed economies are already experiencing a mild debt-deflation. While the risk of deflation among emerging economies seems remote, the criticality of avoiding the negative spiral is becoming increasingly pronounced.

The liquidity infusion is not even able to compensate for the freezing and de-leveraging of credit markets, so how can it be inflationary? Crisis loans are normally made at penal rates to prevent moral hazard.

But i think , rates have to be lowered to stimulate a recession-hit real sector. Targeted infusion, such as direct loans to firms in need, is more useful than general pumping into markets that are caught in a panic-cum-liquidity trap. Rate cuts are limited when rates are as low as 1%. Fiscal measures are required.

Indian interest rates, however, are high. Liquidity boosts here are just compensating for dollar sales. The repo rate cuts do not even compensate for an earlier inflation fighting excessive tightening despite an industrial slowdown. The only use of monetary tightening in a commodity price shock driven inflation is to anchor inflation expectations. But the collapse of commodity prices and the global recession provide this anchor. Domestic credit has to substitute for the freezing up of foreign credit so it is not wise to stick to credit or money supply growth targets. Firms are vulnerable, exposed to leverage, in the middle of an investment cycle.