Thursday, September 20, 2007

What will RBI do now ?

The sign of maturity of any economy is in its attainment of functional automation without having the need for frequent policy interventions. In that sense, if central banks gradually loosen their grip and reduce the frequency and magnitude of their intervention and monetary control, the economy should reflect a fair sense of its health through its currency exchange rates in relation to that of others.

But TCA Srinivasa Raghavan in his article has observed that the balance of opinion is in favor of intervention, for some reasons. One is that no central bank chief wants to be held responsible later for not warding off a recession. So he or she does the popular thing. The other reason is perhaps that everyone has learnt from the Asian crisis that when the going gets tough, the credit flow must start going. To choke off the tap is to invite disaster where people who had nothing to do with the problem lose their jobs and property.

So do Bankers that expect the Reserve Bank of India to soften its view on interest rates in the light of the US Federal rate cut. Domestic loans and overseas borrowing may become cheaper, they say.

But I go if central banks intervene, are they not defending or even protecting the bad guys who were indiscriminate in their processes (like subprime lenders that overlooked creditworthiness of borrowers) and screwed up not just themselves, but everyone in the end? Do they deserve to be bailed out? How different is it from the tax amnesty schemes that ridicule many an honest taxpayer?

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