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From 50 Years Ago: An Exercise in Vedanta.

Editorial from Volume IX, No 6, February 9, 1957.

When the Reserve Bank announced that the bank rate remained unchanged within an hour of announcing that the rate of interest on advances against Government securities had been raised from 3½ per cent to 4 per cent, the market was more than a little puzzled. The bank rate had always meant for the market the rate at which the Reserve Bank lent against securities. There had been many learned disputations in the past that India never has a proper bank rate, because that rate had been conventionally defined as a rate of discount on eligible commercial paper, while the bank rate here was a rate of interest, not of discount. Indeed, the market had no occasion to doubt what the bank rate was. On the last occasion when the bank rate was raised in 1951, it was the rate at which the Reserve Bank lent against Government securities. Moreover, when the bill market scheme was introduced soon after this, the rate charged was kept ½ per cent below the bank rate, in order to popularise borrowing against bills. This rate was subsequently raised by stages to 3½ per cent and remains unchanged; it is the stamp duty on bills which has now been raised so that the cost of borrowing has been brought on a par with that against securities...

The market, not being used to competing abstractions, naturally felt puzzled. But what about the distinguished members of the Central Board of Directors who had authorised t h e a n n o u n c e m e n t t h a t t h e b a n k r a t e remained unchanged? The explanation that has been offered by one of the most distinguished members of this Board, off the record, runs on these lines: That the bank rate is a rate of discount and that though quantitatively it might be insignificant, the Reserve Bank has, as a matter of fact, been discounting all along a certain quantity of genuine commercial paper and rupee import bills which fulfil the eligibility conditions; and that, when the bill market scheme was introduced at a concessional rate, even during that period, genuine bills used to be discounted at the bank rate, while the ersatz ones, made to order to conform to the bill market scheme, carried a lower rate of interest. This explanation unfortunately has no basis in fact because the Reserve Bank has at no stage discounted any bills and therefore the ‘official’ bank rate, like the Nirguna Brahma of Vedanta, has never been manifest. It is a light that never was on land or sea.

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