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Straight from the Specialists

Need to rebalance RBI’s interest structure

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

In its mid-quarterly monetary policy review last month, the Reserve Bank of India (RBI) made some hasty changes in the interest structure. The repo rate was raised possibly because of the rise in inflation and the marginal standing facility (MSF) rate was cut after the rupee recovered against the dollar. The interest structure is still lopsided with short rates exceeding long rates. This anomaly needs to be corrected.

It is believed that the economy is susceptible to a rundown when short rates exceed long rates. A further slowdown, in any case, needs to be prevented and is quite feasible since the compelling conditions that necessitated an interest hike have been contained. There is now enough room for the RBI to restore balance.

The rupee stress has eased and it is likely that the currency will not significantly fall for some time; exports have picked up and the current account deficit will be within manageable limits; FII investments have returned and remittances from abroad have gone up.

The external environment, which at one point threatened a crisis, has also improved. The Federal Reserve delayed the tapering of quantitative easing and after the 17-day shutdown of the U.S. government, operations are back to normal. The only barrier yet to be overcome is inflation.

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