The Hindu Business Line : Reverse Repo Rate

Banks prefer parking funds in the RBI to lending them. It is just possible that there is not enough demand for credit given the gloomy economic environment. Entrepreneurs will not borrow just because money is available.

If, however, the government has a reason to believe that banks are unwilling to lend because they have turned risk-averse, one way of dealing with the problem is to close the reverse repo window until further notice. Or, the reverse repo rate could be reduced to 3 per cent — 50 basis points below that of savings bank.

Although funds are fungible, the availability of current account and savings bank deposits and the prudential advantage make it still worthwhile to keep the cash in the RBI rather than lend it.

There is an argument that a reduction in rates will lead to a depreciation of the rupee. Despite the earlier reduction in repo and reverse repo rates, the rupee was gaining in value vis-a-vis the dollar for some time.

Inflow of foreign capital is guided by deposit rates in commercial banks, yields on bonds and the trends in the stock market vis-À-vis those in markets elsewhere.

A. Seshan e-mail

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