Is RBI using wrong tools to fix economy’s problems?

.....RBI’s moves go in the wrong direction. How do we ensure that the price on a financial market is driven by fundamentals? The answer: We must have a deep and liquid market, and a broad array of sophisticated speculators. RBI’s actions are going in the exact opposite direction. They are trying to make the market illiquid. But it is in an illiquid market that we will get market inefficiencies and weird behaviour of the price. They are increasing the chance that something nutty happens on the rupee. This circular is also a reminder about poor legal process at RBI. Every action by a regulator must articulate a rationale. Financial regulations are motivated by exactly two possibilities – consumer protection or micro-prudential regulation. The government agency that wields the power of financial regulation must show the clear rationale, describing what is the market failure that this regulation is seeking to address. The government agency must show the cost-benefit analysis, explaining why the costs of this action outweigh the benefits. As is typical of financial regulators in India today, RBI’s documents show no rationale.........

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