ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Cautious, but Flexible

The RBI's latest monetary policy measures fall neatly into the policy framework pursued for the last five years with the objectives of maintaining a stable financial environment and strengthening the financial system and improving the transmission of monetary policy signals.

Issues in Asset Liability Management - VII

Market determination of interest rates often leads to volatility which has particular relevance to management of the interest rate risk in general and management of fixed income portfolios in particular. Given the size of bank portfolios, volatility of interest rates and need for rigorous performance evaluation, appropriate management accounting systems are essential.

Banking: Missing Dynamism

Even as banks have come to possess a growing share of the community's financial resources, it is the absence of dynamism shown by them in expanding their credit base regionally, functionally and by the size of borrowers that continues to hurt the process of domestic investment and growth. It is necessary for them in a competitive environment to introduce more dynamic instruments of lending and enhance organisational capabilities to shoulder more nuanced lending practices, both of which are missing in the current banking scenario.

Revitalising Growth: Idiom and Message

The main reason why the RBI's latest Report on Currency and Finance has caught public attention is the policy implication of the research presented in it. But while it is understandable that the initial responses are focused on the policy aspects, the analytical aspects of the report too deserve a careful look.

Issues in Asset Liability Management - I

The subject of asset liability management is of relatively recent origin both internationally and, more so, in India. This is the first of a series of articles which will discuss the different issues involved, critically examine the maturity gap model, suggest alternatives, look at the principles of pricing deposits and advances and deal with connected subjects.

Stable Interest Rates Profile

With all-round downward movement of rates of all types and maturities in the past three years, near-stability in the interest rates profile has been achieved. RBI policies of low Bank rate, active management of liquidity and signalling its preference for softening of interest rates have contributed to this development.

Structural Deterioration of Banking Development

The Reserve Bank seems to be stuck between the two stools of reform and facing structural disabilities. It is being forced to accept the trend towards 'universal banking', despite its expressed misgivings. Worse, serious structural deterioration has occurred in the pattern of banking development.

Interest Rate Defence of Exchange Rate

While the rationale for raising the interest rate to defend an exchange rate under speculative attack is well grounded in economic and financial theories, empirical validation of the effectiveness of such a policy stance has generally been difficult and is shrouded with conflicting findings. In India, besides forex market interventions and use of several administrative measures, the Reserve Bank of India has occasionally resorted to the high interest rate option during major episodes of significant pressures on the external value of the rupee. An empirical assessment suggests that one standard deviation shock to the call rate leads to rupee appreciation in the very second month. Similarly, for one standard deviation shock to net interventions, the exchange rate appreciates gradually by a few paise over five months. The impulse response also suggests that in response to one standard deviation shock the exchange rate appreciates by about 8 paise in the second month, but subsequently the exchange rate depreciates gradually, more than offsetting the initial impact of the hike in interest rate.

Modest Ambitions

The mid-term review of the monetary and credit policy for the current year springs no major surprises. It has, in the main, lowered the Bank rate by 50 basis points to 6.5 per cent and proposes to bring down, over the next two months, the cash reserve ratio to 5.5 per cent from the current effective rate (taking into account various exemptions and variable reserve ratios for particular segments of liabilities) of 6.3 per cent for the banking system as a whole. It has made further refinements of the various processes of strengthening prudential regulation of the banking system. More pertinently, it serves to highlight the constraints within which monetary policy operates in India, even going to the extent of drawing explicit reference to some of the structural impediments arising from government policy.

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