External benchmark: Right step, wrong tool

What happens when policymakers do the right thing for the wrong reasons? The outcome may turn out to be good owing to sheer luck, but more likely they are setting the stage for some unpleasant, unintended consequences. This is what may happen as the fallout of the September 4 circular of the Reserve Bank of India (RBI). Beginning October 1 this year banks will have to link the interest rates on such loans to a known external benchmark, instead of using their own opaque internal benchmarks. This is good news for consumers, not because their loans will become cheaper. From now on, banks must all.....

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