Collaretal damage

.....In a so-called textbook response, RBI this past Monday increased the penalty rate at which banks that do not have excess government securities borrow from the central bank, imposed checks on inter-bank liquidity and unveiled plans to hold open market sale of government securities to drain out rupee liquidity from the system. The measures had precise objectives: to squeeze liquidity and squash speculation in the forex market and to make domestic bond yields attractive (though the central bank later in the week looked reluctant to let the yields rise, even when the government sounded more willing, offering to even defer its planned borrowing by at least a week). But these measures have much wider ramifications .....

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