The Policy Rate Mechanism as conceived by Central Bank
Not unusual for a monetarist in
the world who sit down to look periodically at the Policy Rate of their Banks.
To be precisely the monetary policy is assumed statement about the quantum of
money supply at the given interest Rate. The Interest Rate is here a short term
rate at which Banks and Financial institutions are engaged in borrowing and
lending for short time. Such rates are
decided based on an indicative statement of Central Bank as well as following
the demand and supply of Money in the monetary system. And thus a mechanism
evolve out of connect between the Policy statement and the Short term rate. While
Central Banker being the last Lenders resort and Bankers Bank, resorts to
maintain its announced rate for all lending and borrowing purpose, the Market
choose to adopt some admissible variation depending upon the liquidity.
The mechanism of Rate
transmission is further impacted out of prevailing Currency and Bond Market
condition within the financial system. It is now established and measurable to
find out the interrelation between the Bond market and currency market
impacting the Liquidity. Infect in an unrestricted market the impact has been
enormous. So we can safely assume the
rate transmission have other players contributing to the rate mechanism. To add
to the uncertainty is the non parallel transmission of Rate on the Yield Curve.
This completes the short term
rate as practiced and bench-marked in the money market gradually evolving into
Long term rate. The process of this policy transmission is multi lateral and
multi dimensional. Given the array of loans following Time, issuers, tenor and
rating obligation, the Bond market adjust through a possible array of lending
Rate also.
Needless to say the rate
transmission is so complicated market oriented process, that books of theory
are distant in absolute measurement of the fact. The nearest to arrive to the
explanation could be Monte Carlo Simulation as employed for discovering future
Interest rate. The rate architecture further enhances its unpredictability
given the reason that rate are dynamic function of Time. The Variables of Macro
changes with time leading to evolution of dynamic Rate Transmission.
