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

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Stable Interest Rates Profile

With all-round downward movement of rates of all types and maturities in the past three years, near-stability in the interest rates profile has been achieved. RBI policies of low Bank rate, active management of liquidity and signalling its preference for softening of interest rates have contributed to this development.

Structural Deterioration of Banking Development

The Reserve Bank seems to be stuck between the two stools of reform and facing structural disabilities. It is being forced to accept the trend towards 'universal banking', despite its expressed misgivings. Worse, serious structural deterioration has occurred in the pattern of banking development.

Interest Rate Defence of Exchange Rate

While the rationale for raising the interest rate to defend an exchange rate under speculative attack is well grounded in economic and financial theories, empirical validation of the effectiveness of such a policy stance has generally been difficult and is shrouded with conflicting findings. In India, besides forex market interventions and use of several administrative measures, the Reserve Bank of India has occasionally resorted to the high interest rate option during major episodes of significant pressures on the external value of the rupee. An empirical assessment suggests that one standard deviation shock to the call rate leads to rupee appreciation in the very second month. Similarly, for one standard deviation shock to net interventions, the exchange rate appreciates gradually by a few paise over five months. The impulse response also suggests that in response to one standard deviation shock the exchange rate appreciates by about 8 paise in the second month, but subsequently the exchange rate depreciates gradually, more than offsetting the initial impact of the hike in interest rate.

Modest Ambitions

The mid-term review of the monetary and credit policy for the current year springs no major surprises. It has, in the main, lowered the Bank rate by 50 basis points to 6.5 per cent and proposes to bring down, over the next two months, the cash reserve ratio to 5.5 per cent from the current effective rate (taking into account various exemptions and variable reserve ratios for particular segments of liabilities) of 6.3 per cent for the banking system as a whole. It has made further refinements of the various processes of strengthening prudential regulation of the banking system. More pertinently, it serves to highlight the constraints within which monetary policy operates in India, even going to the extent of drawing explicit reference to some of the structural impediments arising from government policy.

Realistic Interest Rates Structure

Considering the need for stimulating domestic savings through a strengthened system of banks and other financial institutions, the present structure of bank deposit and lending rates is generally realistic. The average cost of capital cannot be reduced further without hurting the development process.

Bank Supervisory Arrangements

The purpose of this paper is to examine the choice of location of prudential supervision of banks. Should central banks assume this role or should there be a unified regulator covering all financial institutions? With the growing concern among central banks about the need to maintain financial stability, can such problems be effectively tackled if regulation/ supervision is vested with the central banks? The evidence.

Sir (Abraham) Jeremy Raisman, Finance Member, Government of India (1939-45)

Sir Jeremy Raisman wore several hats in one lifetime - a successful civil servant followed by an equally distinguished corporate career, yet his towering achievements as a statesman for India's cause during the war years of 1939-45 remain unsung. His contributions that dwarfed, by any criterion, those of his predecessors in office are, however, conspicuously ignored by Indian and British historians of the Raj. But it is for his intuitive understanding of India and its economic and political fundamentals, that Sir Jeremy will remain the ideal last Viceroy India never had.

Calcutta Diary

Whatever the finance minister may say in his umpteen statements on the floor of parliament and whatever alibi the RBI and the SEBI may trot out for their lotus-eaters' indolence, nothing much is likely to change in the existing circumstances. Both the RBI and the SEBI may go through the motion of framing a new set of rules to discipline the banks and share markets in order to bring the rogues to book. All this will be for the birds. As long as the fascination for the free market does not dissipate, things will be much the same in the years to come; homage to continuity.

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