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The 2022 Nobel Memorial Prize in Economic Sciences said that things will normalise when interest rates are closer to each other in the US and India.

The 2022 Nobel Memorial Prize in Economic Sciences winner Douglas W Diamond on 27 November opined that Indian rupee should stabilise once the US "reduces the speed of its rate increases", citing difficult to predict exchange rates.

The American economist said that things will normalise when interest rates are closer to each other in the US and India, reported news agency PTI. He added that when the US raises exchange rates unexpectedly, the dollar tends to appreciate.

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The University of Chicago's Booth School of Business professor shared the Nobel Prize with former US Federal Reserve Chair Ben Bernanke and US-based economist Philip H Dybvig for their research into the fallout from bank failures.

The Nobel panel at the Royal Swedish Academy of Sciences in Stockholm, their research has shown "why avoiding bank collapses is vital".

"It is difficult to predict the exchange rates. When the US raises rates unexpectedly, the dollar tends to appreciate. Once the US reduces the speed of its rate increases, the rupee should stabilise," PTI quoted the Merton H Miller Distinguished Service Professor of Finance as saying.

The rupee appreciated 16 paise to 81.54 against the US dollar on Friday.

Diamond also added that the bank monitoring works well when banks are well capitalised and there is little lending to bank insiders.

"I expect this to continue in the future. For savers to get high returns, a reasonable amount of bank competition is needed as well," he argues.

The economist had previously collaborated with former RBI governor Raghuram G Rajan on theory of banking in 2001. He said that their conclusions was that banks need to be a bit fragile to discipline them.

"This remains true. Short-term debt provides discipline because banks must continue to appear healthy to retain their funding. This possible loss of funding does make them fragile," he says.

The research paper of Diamond and Rajan on 'Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking' was published in the Journal of Political Economy.

Known for his research in financial intermediaries, financial crises and liquidity, Diamond research agenda for the past 40 years has been to explain what banks do, why they do it and the consequences of these arrangements.

With PTI inputs.

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