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RBI: Curbing speculation - Views on News from Equitymaster
 
 
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  • Aug 7, 1999

    RBI: Curbing speculation

    The Reserve Bank of India (RBI) has initiated measures to curb the volatility in the gilt (government securities) markets and the forex markets. The RBI has mopped up over Rs 50 bn via issue of new paper and open market operations.

    The volatility in the gilt market was mainly due to the speculation of a possible rate cut by the RBI. This speculation has been doing the rounds in the market primarily due to the conducive economic environment (for the rate cut):

    • a 20 year low inflation rate, implying high real rates
    • relative stability in forex markets (mainly due to increased FII inflows, which have since slowed down)
    • increasing economic activity, which has led to demands from the industry for lower rates

    However, the RBI has denied any such move. Moreover, the chairman of the State Bank of India has gone on record stating that a rate cut is not desirable. Despite this, the rush for government securities continues. The RBI's move to reduce the liquidity will prevent banks and other institutions from speculating in the gilt markets.

    The mop up of funds from the money markets will also lead to a cooling off of speculative activity in the forex markets. This is so because with higher call rates the banks and other institutions will find that the opportunity cost of speculating is high, and therefore they would desist from excessive speculation.

    The RBI's policy of controlling liquidity via the open market route needs to be applauded. However, with the economy showing signs of a revival, an increase in the cost of money will not go down well with the industry.

     

     

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