RBI and its worries

v The RBI Credit Policy has given conflicting signals about the stance of Monetary Policy. Faced with high inflationary expectations on one hand and tight liquidity in money markets on the other, it has left interest rates and CRR unchanged, while announcing Open Market Operation (OMO) to ease liquidity. Recently it has intervened in foreign exchange markets in amounts that could possibly impact the Rupee, and perhaps only help increase liquidity. The Indian Money market is plagued with a different type of disease where cut in policy rates does not transfers to market interest rates. A number of restrictions on the functioning of money, bond and credit markets render it unresponsive to the RBI’s policy rate changes. The operating framework of monetary policy, which works by keeping money market rates within the bracket of policy rates of repo and reverse repo rates, has broken down. This has rendered policy rates irrelevant. In the process of tightening monetary policy in response to inflation it employed many instruments (Policy interest rates, CRR, SLR, and OMO). The multiple objectives, multiple instrument framework only suggests that RBI reacts to the situation in the market on a day to day basis, where different instruments have been moving in different directions.