{"id":2112,"date":"2013-08-07T12:59:22","date_gmt":"2013-08-07T07:29:22","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=2112"},"modified":"2013-08-07T12:59:22","modified_gmt":"2013-08-07T07:29:22","slug":"rbi-is-behaving-like-a-football-goalkeeper","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2013\/08\/07\/rbi-is-behaving-like-a-football-goalkeeper\/","title":{"rendered":"RBI is behaving like a football goalkeeper"},"content":{"rendered":"

\"RBI-Logo_8\"<\/a>
\n 
\nVivek Kaul<\/span><\/span><\/span>
\nA former well respected governor of the Reserve Bank of India (RBI) once told me that in a \u201cmoment of crisis the central bank can’t be seen to be doing nothing\u201d even if \u201cdo nothing\u201d might be the best strategy to follow.
\nThis might well be the spur behind the RBI’s recent defence of the rupee. It started its defence when the currency first closed in on the 60 per dollar mark, by selling dollars.
\nBut selling dollars couldn’t go on indefinitely. India’s foreign exchange reserves are around $280 billion \u2013 equal to around six-and-a-half months’ imports. Such low levels of forex reserves haven’t been seen since the 1990s.
\nThen the central bank tried to squeeze out rupee liquidity by severely limiting the amount of money that banks could borrow from it at the repo rate, or the rate at which the RBI lends to banks, now at 7.25%.
\nBanks are now allowed to borrow only up to 0.5% of their deposits at the repo rate. Beyond that, they need to borrow at the marginal standing facility rate, which is at 10.25%. That’s 300 basis points (one basis point equals one hundredth of a percentage) higher than the repo rate.
\nThis has started to push up interest rates in general.
\nBanks are also supposed to maintain an average cash reserve ratio of 99% with the RBI on a daily basis, against the earlier requirement of 70%.
\nThe RBI had hoped that all these moves would squeeze rupee liquidity out of the market and help it gain value against the dollar.
\nBut nothing of that sort happened. On Tuesday, the rupee lost further value to hit an all-time low of 61.80 to the dollar intraday, before recovering to close at 60.81, again, with RBI intervention.
\nSeveral economists have now come around to the view that the rupee will continue to lose value against the dollar. Rajeev Malik of CLSA, for one, sees the rupee hitting 65-70 to the dollar by next year.
\nGiven this, the RBI’s intervention might at best postpone the inevitable.
\nBut the central bank can’t stop trying, can it?
\nAlbert Edwards of Societe Generale has a very interesting analogy explaining this. As he pointed out in a report earlier this year.<\/span> \u201cWhen there are problems, our instinct is not just to stand there but to do something… When a goalkeeper tries to save a penalty, he almost invariably dives either to the right or the left. He will stay in the centre only 6.3% of the time. However, the penalty taker is just as likely (28.7% of the time) to blast the ball straight in front of him as to hit it to the right or left. Thus goalkeepers, to play the percentages, should stay where they are about a third of the time. They would make more saves.\u201d
\nBut they rarely do that. \u201cBecause it is more embarrassing to stand there and watch the ball hit the back of the net than to do something (such as dive to the right) and watch the ball hit the back of the net,\u201d wrote Edwards.
\nThe RBI is like a football goalkeeper right now. It can’t just stand pat.<\/span><\/span><\/span>
\nThe article originally appeared in the Daily News and Analysis<\/a> dated August 7, 2013
\n(Vivek Kaul is a writer. He tweets @kaul_vivek)<\/span><\/span><\/span>
\n
\n<\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

  Vivek Kaul A former well respected governor of the Reserve Bank of India (RBI) once told me that in a \u201cmoment of crisis the central bank can’t be seen to be doing nothing\u201d even if \u201cdo nothing\u201d might be the best strategy to follow. This might well be the spur behind the RBI’s recent … <\/p>\n

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