Our money in their hands.

Since the financial crisis of 2008 central banks of the US, UK, Japan and Europe have been at the forefront of the battle against recession and to stimulate growth. They brought down interest rates to near 0%, hitting the same savers again, and released a flood of cash into banks by buying up bonds, known as quantitative easing. While rich countries were slashing rates the Reserve Bank in India was having to increase the repo rate 13 times to control double digit inflation. It is interesting to note that the repo rate fell precipitously in 2008, before general elections in 2009, which gave a second 5-year term to the Congress, leading to a near collapse of the economy. The crisis arose because supervision of banks in the west had been lax, allowing them to invest depositors' money in risky assets. Central banks not only determine interest rates, they are responsible for money supply, by printing notes, and keep currencies stable by open market operations. Since the value of people's money depends on central banks one would hope that these banks would be run by professionals with full independence from political interference. Panicked by a fall in share prices the Peoples Bank of China cut interest rate and its reserve ratio to free up more money for banks. At the same time the Chinese government wants its currency to become a reserve currency, like the dollar. It has asked for the yuan to be included in the IMF's Special Drawing Rights which consists of the dollar, the euro, the yen and the pound sterling at present. But surely it the yuan becomes freely traded it would become more volatile and monetary policy would become more difficult? Why would any central bank want to lose control of its currency? Strangely, just like in China, politicians in India are talking about Capital Account Convertibility which would allow free trading of the rupee against other currencies. To put it into perspective, daily trading in currencies in the world exceeds $5 trillion, which is 2.5 times our annual GDP. Big banks trade in currencies and form cartels to fix Libor rates to make money. In the last 6 months regulators have fined 6 big banks $10.3 billion for manipulating the Libor rate but with profits going into tens of billions banks will continue price fixing while happily paying fines. For us in India an influx of foreign money does not contribute to growth because it is hot money and can flow out as easily it flows in. About 2 years back the rupee fell to 69 to the dollar just on fears of a cut in bond buying in the US. Allowing the rupee to be traded freely will increase volatility which will make it difficult for firms to fix prices and get into long term contracts for supplies of commodities. Central banks may not be perfect but at least they belong to the nation. Who will control the cowboys?