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Former SEBI whole-time member Ananth Narayan has called for India to adopt a more market-driven approach to interest rates, arguing that freer interest-rate markets would reduce the Reserve Bank of India's need to intervene in the foreign exchange market. Speaking at an event in Mumbai, he said interest rates and currency markets are closely linked and should not be viewed separately. Narayan also highlighted concerns over fiscal practices followed by some states, while appreciating the Central government's efforts to improve fiscal discipline and manage the fiscal deficit.
Former SEBI whole-time member Ananth Narayan has suggested that India should gradually move towards a more market-driven interest-rate system, stating that such an approach would reduce the need for the Reserve Bank of India (RBI) to frequently intervene in the foreign exchange market.
Speaking at an event organised by the National Council of Applied Economic Research (NCAER) in Mumbai during the past week, Narayan said he broadly believes in free markets, while acknowledging that regulatory intervention may still be required in certain situations. He explained that markets should be allowed to function freely as much as possible instead of relying on frequent intervention.
Drawing from a conversation with a large fund manager, Narayan said the investor had pointed out that RBI's market operations were making government bonds more expensive. According to him, developments in financial markets should be viewed in a holistic manner rather than in isolation.
Narayan, who began his career as a trader before moving into academia and later serving as a whole-time member at the Securities and Exchange Board of India (SEBI), is currently associated with IIT Bombay.
He said discussions on India's financial markets often focus on whether the currency market is sufficiently free, while there is very little debate on distortions in the interest-rate market. According to him, the existing policy framework tends to treat interest rates and currency markets as separate areas, even though both markets are deeply interconnected.
Narayan argued that allowing interest rates to be determined more by market forces of demand and supply would naturally reduce the RBI's need to intervene in the foreign exchange market. He suggested that changes in one market inevitably influence the other, making it important for policymakers to consider both together.
The RBI has regularly intervened in the foreign exchange market in recent years to manage excessive volatility in the rupee. Such interventions became more frequent when the Indian currency touched record lows against the US dollar, with the central bank maintaining that its actions were aimed at reducing sharp fluctuations rather than targeting a specific exchange rate.
Apart from commenting on monetary policy, Narayan also spoke about India's fiscal position. He appreciated the Central government's efforts to improve fiscal discipline and contain the fiscal deficit through better financial management.
However, he said similar progress was not visible across all state governments. According to Narayan, there is a tendency among some states to defer expenditure to the following financial year. He cited estimates suggesting that up to 1.5 per cent of expenditure is shifted in this manner.
He also referred to what he described as financial suppression in the market, saying the RBI purchases Central government bonds primarily to support liquidity, while adding that these operations also influence the broader bond market.
Source PTI
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