The Reserve Bank of India issued a press release announcing to the world at large that :
- it now has the power to set the cash reserve ratio (CRR) - the proportion of bank funds that it pre-empts - at any level. The floor and cap of 3% and 20% respectively no longer stand. The central bank thus has the flexibility to keep the reserve ratio at any level desired; and
- it does not, now, need to pay any interest on the funds so pre-empted.
Thus, Indian banks will now not make, even, the miniscule 0.5% p.a. that they used to make on CRR balances.
This announcement comes on a day when :
- it was revealed that India’s foreign exchange assets have, for the first time ever, crossed USD 200 bn. This puts India in a select group of countries with reserves in excess of 200 bn.
- The Indian rupee (INR) touched a new 9 year high against the US dollar (1 : 42.50).
- Overnight money rates are close to historic lows. Rates for collateralised borrowing had collapsed to as low as 0.10% p.a. on Thursday.
A couple of days ago, RBI also revealed that it had bought close to USD 12 bn in the currency markets in the month of February. This is a record, unthinkable until even recently. The figures for March will be revealed in May, though they are likely to be lower than the February figure.
All this, when the central bank is supposedly trying to tighten monetary policy and remove accomodation.
To me, RBI has lost “control of its monetary policy.”
Now, where did I hear this before!
Oh yeah! isn’t it one of the pillars of the “Impossible Trinity”
The Impossible Trinity
(Impossible Trinity Diagram Source : Wikipedia)