4.2 Financial Repression

For all practical purposes, financial repression is a thing of the past. One crude measure of
repression can be got by comparing the inter bank call market rate (which was more or less
free market determined even in the 1980s) with the short term bank deposit rate. From 1981-
82 to 1992-93, the call rate exceeded the one year bank deposit rate in every single year with
a median excess of 1.5%. From 1993-94 to 1999-00, the situation was reversed: the bank
deposit rate exceeded the call rate in 5 out of 7 years, and the median excess of the deposit© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
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rate over call rate was 1.6%. This suggests that in the 1980s, the bank deposit rate was
repressed to the extent of about 3%.
When the prices of financial assets are determined by the free play of market forces, financial
markets are able to perform the important function of allocating resources efficiently to the
most productive sectors of the economy. To the extent that this has happened in India, this
must count as one of the most enduring and decisive successes of the financial reforms.
It must however be added that as discussed elsewhere in this paper, the regulators have a
tendency to use several indirect tools (including at times “moral suasion”) to influence the
direction of the market even after administrative controls have been removed. When this
happens, many of the benefits of free financial markets are lost.