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.

Posted at 4:28 pm IST on Wed, 28 Oct 2009         permanent link

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