Banking and Finance
RBI's cruel dilemma
IT has become a familiar routine. A demand-supply imbalance in the forex market sends the rupee down. After watching the action for a few days, the Reserve Bank of India warns the market that speculation against the Indian currency will not be tolerated. At the same time, it squeezes liquidity in the money market, hoping that punitive domestic interest rates will stabilise the exchange rate.

RBI doesn't like to be pre-empted
CENTRAL banks do not like to be pre-empted by the markets on issues such as interest rates and exchange rates. And where the market seems to be taking positions on the assumption that the central bank would have to necessarily adopt a particul ar policy stance - for instance, if positions in interest rate sensitive assets are built up on the assumption that the Reserve Bank of India will have to keep interest rates soft, that could indeed provoke the RBI into taking such steps as wou ld disabuse any such market impression.

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