§ 31. Mr. PETHICK-LAWRENCEasked the Under-Secretary of State for India what were the reasons which prompted the Government to insist upon the Imperial Bank raising its rate from 7 to 8 per cent.?
§ The UNDER-SECRETARY of STATE for INDIA (Earl Winterton)With the hon. Member's permission, I will circulate in the OFFICIAL REPORT an extract, which is rather long, from a reply given by the Finance Member of the Government of India in the Indian Legislative Assembly on 26th February dealing with the point raised by the hon. Member.
Following is the extract:The action taken by the Government was taken in its capacity as Chief Currency Authority—a responsibility belonging in most other countries to a Central Bank. It is only natural that in this capacity the Government should take steps to see that money rates in India are so adjusted as to avoid a depletion of their gold and sterling Reserves. The main factors in the situation on the strength of which the Government took their decision were as follows:
- (a) The decision of the Bank of England to raise their rate from 4½ per cent. to 5½ per cent., a course which was forced on the Bank of England by the high rates prevailing in the United States and the consequent export of gold from England to the United States. The circumstances in which this rise in the English bank rate took place indicated that there was likely to be a period of high money rates in the big financial centres of the world. This may be described as the immediate cause for the action by the Government of India, and it must be remembered, when comparing the present 8 per cent. with the maximum rate of 7 per cent. prevalent in the last two years, that the Bank of England rate since March, 1927, had been steady at 4½ per cent. Our policy could not
2427 be unaffected by the sudden rise to 5½ per cent., for it is impossible to isolate policy in India from financial conditions in the outside world. - (b) While this special factor operated as an immediate cause, local conditions were such as to create a predisposition for making such a cause operative. In the height of the busy season, exchange was weak, the banks were borrowing heavily instead of placing themselves in funds by selling exchange, stocks of cotton were accumulating in Bombay and, generally speaking, the indications were that in order to maintain the equilibrium of exchange and to ensure that Indian prices moved pari passu with gold prices, it was necessary to raise the level of the money rates in India. If the implication of this question is that there is anything abnormal in such action or that it indicates an artificial control which is not exercised by the currency authorities in other countries, I wish to say most emphatically that any such implication is incorrect."