Rating the RBI
Jul 30 2007, 00:00 IST
How should one judge the RBI’s credit policy statement, due tomorrow? In the current context, it would be worthwhile evaluating it from three points of view, on a checklist adding up to 10 points. The first aspect is: does the RBI get back to its core job of managing monetary policy? At present, it is suffering the embarrassment of a dysfunctional interest rate signalling mechanism. The RBI lends overnight funds at 7.75% and borrows at 6%, and this band is supposed to set the market’s short-term rate. But it also has a borrowing cap of Rs 3,000 crore per day, which is such a small figure that the money market ends up with a call rate that displays complete disregard for the RBI’s intent. So, if the RBI reduces the gap between the two rates to
1 percentage point, and removes quantitative limits on both borrowing and lending, award it three points. The second checkpoint is: does the RBI abandon its defence of the dollar exchange rate of Rs 40? The last time round, it tried in vain to prevent a rupee appreciation and then let go in mid-March. Exporters were blindsided by this sudden move, and they did not even have recourse to the safety of a good hedge in a local currency derivatives market. So, this time round, if the RBI starts making its intentions loud and clear to all, allows a currency futures and options market to emerge (with no restrictions on access), and finally embarks on
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