This refers to the editorial "RBI puts onus on banks" (April 8). The repo rate is a signaling rate to help economic agents anchor inflation expectations to be factored in to the economic decision-making process. The repo, an overnight rate, has no proven relationship with the dynamics of the term segment of the yield curve. The repo rate also has no direct impact on the banks' balance sheets.
Given the inventory of assets and liabilities of banks, a reduction in the lending rates without a commensurate reduction in deposit rates might not be a feasible business proposition for all banks, as and when a rate cut is announced by the Reserve Bank of India (RBI). This proposition is not possible unless it is supported by a responsive financial market with depth and liquidity, which does not exist. The process of calibrating the expected reduction of inflation rate given a dose of rate cut by the RBI is unknown and complicated. Therefore, the signal rate appears to be of little use for households.
The repo rate is not effective in aligning various market interest rates because of many structural limitations of the monetary and financial system. The central bank's monetary policy instruments need to be more definitive and direct. They need to impact intended constituencies and outcomes instead of being a mere signal left to the discretion of the economic agents.
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Given the inventory of assets and liabilities of banks, a reduction in the lending rates without a commensurate reduction in deposit rates might not be a feasible business proposition for all banks, as and when a rate cut is announced by the Reserve Bank of India (RBI). This proposition is not possible unless it is supported by a responsive financial market with depth and liquidity, which does not exist. The process of calibrating the expected reduction of inflation rate given a dose of rate cut by the RBI is unknown and complicated. Therefore, the signal rate appears to be of little use for households.
The repo rate is not effective in aligning various market interest rates because of many structural limitations of the monetary and financial system. The central bank's monetary policy instruments need to be more definitive and direct. They need to impact intended constituencies and outcomes instead of being a mere signal left to the discretion of the economic agents.
Biplab Chakraborty Kolkata
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201
E-mail: letters@bsmail.in
All letters must have a postal address and telephone number