And indeed, overnight rates have come down significantly. The overnight Mumbai inter-bank offer rate, or Mibor, which had moved up from 8.4% on 9 September to a high of 17.2% on 1 October, fell to 6.07% on 24 October, a clear sign that overnight money has now become cheaper.

But a look at the three-month Mibor rate tells a different story.

As the chart shows, while the three-month rate, too, has come down from the high of 13.2% reached on 10 October, it remains at a high level. On 25 October it was at 11.67%, well above the 11.18% rate it was at on 1 September.

Also See Liquidity Still A Problem (Graphic)

In short, in spite of a 250 basis points CRR cut, a 100 basis points repo rate cut, an effective statutory liquidity ratio cut and other liquidity-enhancing measures, the three-month Mibor is still around 50 basis points above the level it was on 1 September.

One basis point is one-hundredth of a percentage point.

A similar situation is also seen in the dollar Libor, or London inter-bank offered rate. While overnight Libor rates have come down quite sharply from their peaks, the decline in the three-month Libor rate has been much more modest.

Apparently, while banks have no problems lending to each other for short periods, they hesitate when it comes to three-month loans. That’s probably because, in the current environment, anything can happen in three months. Shouldn’t RBI have listened to the message being given by the three-month Mibor?

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