ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Its Impact on the Money Market

Monetary Policy in the Current Busy Season

The credit policy for the 1966-67 busy season had laid down a limit upto which Reserve Bank would lend to scheduled banks at the Bank Rate of 6 per cent; borrowing beyond this limit was to attract a minimum penal rate of 10 per cent. This created a situation in which the inter-bank call market rate could be expected to go up to near 10 per cent. But how can one explain an inter-bank rate of 12 per cent?
An excessively high inter-bank call rate not merely affects the banks concerned but in the end its consequences fall on the marginal borrower, particularly the small entrepreneur. For the class of small entrepreneurs credit has become not only highly expensive but also virtually unobtainable.

This serious distortion of interest rates could have been prevented by an active policy of open market purchases of government securities from the market or the banks. But, unfortunately, the authorities have taken a passive attitude in the belief that what happens in the inter-bank market is not a matter of concern to them.

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