ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Distortions Come to the Surface

EPW Research Foundation Distortions Come to the Surface Macro Perspective CAUGHT in the shocks of adjustment to a situation of liberalisation, the financial system, contrary to official expectations, has plunged into a quandary. Many distortions associated with a free-for-all environment have come to the surface. First, within a short period of a year or two the economy has swung to the extremes, from an abundance of liquidity to an acute shortage of liquidity and now back to an easy situation. Underlying these swings has been the dependence of the financial system on the injection of liquidity from outside, even as the natural growth of financial savings has remained stunted. The blocks of assets externally injected in spurts are gobbled up by the pent-up demand for funds by the private sector and the government alike. Secondly, the apparent consequence of sw ings in liquidity is seen in increased uncertainty for both the purveyors of institutional credit and productive enterprises seeking credit. Banks seem to have become extremely loan wary, thus seeking more solace in risk-free sovereign instruments. A third and final distortion is to be seen in the structure of interest rates. While immediate liquidity considerations are tending to push short-term rates downwards, the rates for bank loans and loans of term-lending institutions have remained high and sticky as a result of the high-cost funds mobilised by banks as well as the FIs.

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