The economic metaphor of "pushing a string" comes to mind in describing RBI action in the past month-and-a-half. The Indian central bank has reacted with commendable speed and an open mind to the global financial crisis. It remains to be seen how effective those actions will be.

While no major Indian institution has gone bust (yet), RBI has had to cope with pressure from several sides. There's been currency pressure with the FIIs pulling out $10 billion from Indian equities, in a scenario where crude oil imports are still costing a bomb. That has pushed the rupee down to 49 and it could dip further.

There were rumours of ICICI [Get Quote] collapsing. There is terror in store for home loan financiers and retail bankers, who are expecting defaults to jump. There's the spectre of stagflation with inflation high and growth rates being revised down.

The fall in stock market prices has several knock-on negative effects. Down the line, there are question marks about FCCBs, which will not be converted into equity at current prices, as companies  blithely assumed at the time they raised the funds.

That could mean that India Inc has to find ways to refinance several billion dollars worth of loans through the next financial year.

Low stock prices also impact the primary market, which is effectively dead. It negates the ability of listed companies to raise more funding through rights issues and private placements. So it's goodbye to free cash.

Inflation is now falling, which is one blessing. But perhaps it's falling for the wrong reasons. A lack of demand is leading to inventory liquidation. Commodity users at the end of the value chain are buying less because they are selling less.

Commodity producers are therefore selling off stockpiles. That has led to falling prices for commodities and, here again, the India experience is a reflection of what's happening abroad. Many companies are also re-examining expansion plans due to slack demand.

RBI has done the only thing it can at this stage --opened the tap by massive CRR cuts and also eased access to funding abroad. The problem is that the availability of easier credit doesn't necessarily translate into greater credit offtake. More offtake occurs only where there is demand for funding -- you can push a string, but it only tightens when there's somebody pulling it as well.

In the current situation, banks are also wary of lending to areas where demand for credit exists -- real estate, retail loans.

In order to protect against possible defaults, they are still holding short-term rates high. While T-bill and G-Sec yields have already fallen and could fall further, commercial borrowing rates are still high. When a bank would literally prefer to keep its money in the bank, there's not much to be done. 

It is a gloomy situation and  effects of the CRR cuts would anyhow take a little time to filter through. Banks have to regain their confidence with respect to normal operations before they will drop rates and companies have to regain their confidence about future demand before they will borrow again in significant amounts.

The hardest-hit sectors will be real estate, banking, brokerages and other financial services, construction and commodities, such as metals and cement. These are in trouble on several fronts -- demand shrinkage, high cost of borrowings, high leverage, potential FCCB problems, etc.

Engineering could be in trouble if capex shrinks a great deal, but most majors have full order books at this instant. Telecom companies may have trouble financing the rollouts and licence fees implicit in 3G upgrades, but the impact would be differential. IT has a problem with the weak US economy, but it has cash on the balance sheet.

A contrarian would say that this is all news that is already on the front page. Financials may deteriorate further, but the market has already discounted much of this information. Does this make it a market worth buying into in a selective way? If you avoid the sectors where more damage is likely to occur, you are getting reasonable prices.

But there is the final whammy of political uncertainty. There are bound to be panic sell-offs during the period of general elections until a new government is installed. I'd keep a war chest for opportunities that may arise during that period.