FILE PHOTO: A security personnel member stands guard at the entrance of the Reserve Bank of India (RBI) headquarters in Mumbai | Photo: Reuters
Your editorial "Rate or stance
" highlights an important issue that has been brought into focus by the Reserve Bank of India
(RBI) Governor Shaktikanta Das’ (pictured) speech in the recently concluded fund-bank meeting in Washington. One possible way to calibrate the interest rate response is possibly to look at the level of neutral rate. If one assumes that the neutral rate in the United States is about 3 per cent, while the same in India being at least 6 per cent, a 25 basis point rate response will amount to about 8 per cent of the neutral rate in the US while in India it will be about 4 per cent.
Given the rigidities in transmission in emerging markets, the effective rate response may even be lower. Hence there's possibly a case for calibrating rate response to the level of interest rates. The second issue you talk about in the edit is the need to ensure liquidity. Clearly, a central bank cannot target rate and liquidity simultaneously. If the interest rate (including term deposit rates) is what the central bank policy is designed to target, it should be possible to provide any amount of liquidity to achieve the target.
Indranil Chakraborty, Mumbai
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