When only self interest matters.

Last week the Reserve Bank decided to limit the amount banks could borrow from it through the Marginal Standing Facility. Normally banks could borrow at 1% above the Repo rate which is taken as the interest rate in India. Now banks can borrow up to Rs 750 billion at 8.25% and anything more than that will attract interest at 10.25%. The aim of the RBI is to tighten money supply so that banks are limited from buying dollars from the market, which would support the rupee. If exporters feel that the rupee will become stronger in the near future they will bring their earnings back from abroad to take advantage of a strong dollar while importers will wait for the rupee to strengthen to lower their costs. The RBI also decided to sell bonds worth Rs 120 billion through Open Market Operations on 18 July to further suck liquidity out of the market. In effect the RBI was trying to raise the cost of borrowing without actually raising interest rates. Naturally traders, having read RBI signals of higher interest rate, wanted much higher yields because if the cost of borrowing goes up for everyone the government has also got to pay more. This the RBI refused to pay. So the bank was able to sell only Rs 25.32 billion worth of bonds. It also cancelled a Rs 120 billion Treasury Bill auction. Livemint, 22 July. These are short term bonds which get rolled over automatically so by buying these back the RBI actually infused Rs 120 billion worth of liquidity into the market. A frustrated trader, who wanted to remain anonymous, asked," You raised the borrowing costs, but you do not want to accept bids at higher yields......what is that you want?". " The entire exercise seems to have been done without realising the possible impact on bond markets." Pathetic as these measures were the Finance Minister rushed out to make sure that they failed. " These measures ( RBI decisions ) are intended to quell excessive speculative activity in the foreign exchange market and to stabilize the rupee. I believe these measures are for the short term and certainly should not be interpreted as a prelude or precursor to some kind of tightening policy," he said. Livemint, 17 July. Why is the Congress so terrified of high interest rates which will reduce inflation, increase bank deposits, support the rupee, and reduce the attraction of gold as people get better returns from term deposits, thus helping to reduce the Current Account Deficit? What are they hiding? Are they afraid of a collapse in property prices, have they been promised money for election expenses by rich people or they do they want to borrow massive amounts to bribe the " vote bank "? Whatever the reason, it is only to hide the dire state of the economy till elections are over. After that, let India collapse. Who cares?