Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Indian overnight interbank market in October 2008

The Reserve Bank of India’s Report
on Trend and Progress of Banking in India 2008-09
has a series of
charts (Chart VII.3 on page 250) comparing the volatility of the
overnight interbank interest rate in India with that of several other
(mature and emerging) economies.

India and Russia stand out in the charts for the ridiculously high
volatility in October 2008. The inability to keep the overnight rate
close to the policy rate in these two countries is so glaring that one
is forced to conclude that central banking was virtually suspended in
India and Russia for a few weeks in that period.

It is not that the mature economies were doing a great job of
liquidity management in those days. Only in August 2008, Willem
Buiter
had gone to the Jackson Hole symposium to tell the
assembled central bankers that “The deviations between the
official policy rate and the overnight interbank rate that we observe
for the Fed, the ECB and the Bank of England are the result of bizarre
operating procedures …” (Page 531). If the mild volatility in
the US and Europe appeared bizarre to Buiter, I wonder what he would
say if confronted with the Indian data.

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