This feeds illiquidity and volatility in financial markets and delays the return of confidence in the financial system. This could aggravate the adverse feedback loop between the financial system and the real economy.
By end-January, 2007 i.e., at the time of formulating the Third Quarter Review of monetary policy, these dilemmas had become sharper and more testing than ever before. Taken together, global developments seemed in what could be described as a stable disequilibrium, and hence did not provide any definitive indication for a policy response.