The Reserve Bank of India and the People’s Bank of China were worried that sticking with traditional policy rates or bank reserves would have had a greater impact on the overall economy and slowed growth, which they wanted to avoid. Photo: Pradeep Gaur/Mint 

Singapore: The bold monetary experiment that the Indian and Chinese central banks engaged in this year might one day be hailed as a success. So far, the result has been unprecedented market volatility and little else.

Both central banks targeted interbank rates to control the supply of money, aiming for a more surgical monetary tool than orthodox bank reserves or policy interest rates.

The People’s Bank of China (PBOC) and the Reserve Bank of India (RBI) were worried that sticking with traditional policy rates or bank reserves would have had a greater impact on the overall economy and slowed growth, which they wanted to avoid.

“They shifted to a more interest-rate based system in both cases. Both central banks should be applauded for doing that,” said Frederic Neumann, co-head of economic research at HSBC in Hong Kong.

Both central banks are looking to liberalize their markets, but PBOC and RBI are adopting a similar policy strategy in very different situations and for different reasons.

China is now using its open market operations almost exclusively to try to rein in a credit binge. Apart from growth concerns, PBOC feared that raising policy rates or reserve ratios would have added unwelcome fuel to a rally in its currency.

India had similar GDP concerns after growth slumped in recent years. But, unlike China, it urgently needed to shore up its currency, which dropped in August to a record low, and to tame steep inflation.

Amit kumar pandey

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source- livemint