ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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RBI's Withdrawal from Primary Issues of Government Paper

If the RBI, in conformity with the FRBM Act, withdraws, beginning in April 2006, from primary issues of government paper, it will lose its leverage on interest rates. The chances then are (i) government loan rates determined by market forces will reach unreasonably high levels, and (ii) this will in turn set the pattern for commercial deposit and loan rates which will not be conducive for a healthy growth in the real sector. The government and the RBI will then be left with no effective devices to contain the financial market's proclivity to push up primary yield rates on government securities to unrealistically high levels. This is happening at a time when, apart from increased borrowings by the central government, the states are being pushed to the market for higher borrowings entirely in lieu of the centre's plan loans. The situation is thus replete with dangerous implications for the macroeconomy.

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