ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Interest Rates in Disarray

CLOSE on the heels of the instability and uncertainty on the exchange rate front and the sizeable depreciation of the rupee, there has occurred greater instability, speculation and shooting up of interest rates in the inter-bank call and overnight money market. Reflecting the growing shortage of liquidity in the system, the call rates had been firming up since the middle of September, ruling in the range of 15 to 20 per cent. Towards the end of October, they touched 25 per cent and on November 2 they were quoted at 85 per cent when the RBI refused to inject liquidity taking the position that there was enough liquidity in the system and that the sharp rise in the rate reflected the panic reaction of bankers who had not done their homework. Bui the very next day, exactly in the way it reacted on the exchange rate front, the RBI was forced to inject liquidity to the tune of nearly Rs 1,000 crore which brought down the call rate from 85-87 per cent, though only to 40 per cent. It is obvious that on both fronts, RBI intervention has provided only temporary respite. Both markets are now precariously balanced.

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