If we are to use these rates, however, as an index, a few warnings are first necessary. There is, of course, in India, just as there is in England, not one single rate for money, but several rates according the period of the loan required (or the maturity the bill negotiated) and the character of the security offered. The published Bank Rate in India represents, I believe, the rate charged day by day for a loan advanced on such security as Government Paper. The interest on a loan of this kind, that is to say, is calculated day by day at the published Bank Rate prevailing on each day. It may be said to correspond, therefore, to the London rate for some comparatively short period—say for fortnightly loans. Because the Bank Rate is at 7 per cent, it does not follow, therefore, that money can be used, or obtained, at this rate for two or three months. The rate ordinarily charged for fine bills of two or three months’ currency may be either higher or lower than the published minimum Bank Rate. Further, the rates published by the Presidency Banks may be from time to time more or less “effective.” The Banks may not always be able, that is to say, to do any considerable volume of business at their published minima. This would not be the case, I believe, in the busy season, so much as in the slack season, when the Banks do not let their published rates fall below 3 per cent, although money may be practically unusable and they would probably be glad enough to lend a large sum at 2 per cent. But these various qualifications do not prevent the Presidency Bank Rates from affording the best available index for measuring the relative ease or stringency of the Indian Money Market. I append a chart giving the movements of the Rate of Discount at the Presidency Bank of Bengal since 1893.[125]
2. The rates, announced by the three Presidency Banks, are not always identical, but seldom, if ever, differ by more than 1 per cent. Such differences as there are chiefly reflect the differences in date at which occur the various crop movements with which each Presidency is mainly concerned. A wider difference of rate tends to be prevented, not only by the possibility of moving funds from one part of India to another, but also by the fact that the Secretary of State is willing to make his Bills and Transfers payable at any of the Presidency towns at the option of the purchaser. If there is relatively greater stringency at one of them, the bulk of the Council Bills and Transfers sold in London tend to be drawn on that one. The general appearance of the chart would not, therefore, have been appreciably different if I had chosen Bombay in place of Bengal.
The official rates move by 1 per cent at a time. There have been occasions of movements by 2 per cent, but not recently. When the rate is rising or falling, however, at the beginning or end of the busy season, changes often follow one another in quick succession.
3. An examination of the chart shows that the Indian Money Market enjoys years of high and low average rates respectively, just as other markets do. But these annual variations, while perfectly noticeable, are relatively small in comparison with the seasonal changes, which are very great and very regular, and which afford the most clear ground of differentiation between the Indian Market and those with which we are familiar in Europe.
Let us examine the annual fluctuations of the rate in recent years in more detail:—
| Bengal Rate per Cent. | Bengal Rate per Cent. | |||||
| Max. rate in February. | Min. rate in August. | Max. rate in February. | Min. rate in August. | |||
| 1900 | 8 | 3 | 1907 | 9 | 3 | |
| 1901 | 8 | 3 | 1908 | 9 | 3 | |
| 1902 | 8 | 3 | 1909 | 8 | 3 | |
| 1903 | 8 | 3 | 1910 | 6 | 3 | |
| 1904 | 7 | 3 | 1911 | 8 | 3 | |
| 1905 | 7 | 3 | 1912 | 8 | 3 | |
| 1906 | 9 | 3 | 1913 | 8 | ||
From this table and the chart it is safe to make the generalisation that the Indian Rate may be expected to reach 8 per cent in the winter or early spring, and to fall to 3 per cent in summer. Years differ from one another chiefly in the length of time for which the high and low rates prevail respectively. From 8 to 3 per cent is an enormous range for the normal seasonal fluctuation. What is the explanation of it? The Bank of England rate seldom exceeds 5 per cent, and in many years falls short of this, even in the winter. If there is so regular an expectation of obtaining 7 or 8 per cent in India on excellent security, why is it not worth some one’s while to transfer funds to India in the busy season on an ampler scale than is the case at present, and thus secure the advantage of so wide a discrepancy between the English and the Indian rates?
4. The facts are to be explained, I think, as follows. High rates of 7 or 8 per cent are not obtainable in India all the year round. In normal years they cannot be relied on to prevail for more than about three months. The banker who raises funds in London in order to lend them for short periods in India has to choose between leaving them in India all the year round, waiting after one busy season for the next, and bringing them back again to London after a comparatively short period. He must either accept, that is to say, the rate obtainable in India on the average of the whole year, or he must earn a high enough rate in the brief busy season to compensate him for bearing the expense of remittance both ways.
In considering the difference between two European Bank Rates as the cause of a transfer of funds between the two centres, the cost of remittance, as measured by the difference between the telegraphic rate of exchange outwards at the beginning of the transaction and the telegraphic rate of exchange back at the end of it, is not, of course, to be neglected. But where the two centres are near together and there is no reason to anticipate the suspension of a free market in gold, this cost is, relatively, a minor consideration. The great distance, however, between London and India makes it in their case a very significant quantity, and a brief calculation shows that, measured in terms of Bank Rate, the cost of remittance works out higher, perhaps, than uninstructed common sense would anticipate. For, under present conditions, the cost of remittance both ways can hardly be less than 1/16d. per rupee, rising in most years as between certain dates as high as 5/32d., and reaching occasionally as much as 3/16d. It would not be prudent to act on the expectation of a less cost than 3/32d. Now 3/32d. on a rupee is about ·6 per cent. If this loss on exchange (i.e. on remittance) is to be recouped in three months (i.e. in a quarter of a year), an additional rate of nearly 2½ per cent per annum must be earned in India as compared with the rate in London. If a different degree of loss in exchange is anticipated, and if the length of time for which money can be used in India at a high rate is expected to be more or less than three months, the calculation must be adjusted accordingly. In any case the reason why the Indian and London Bank Rates can differ from one another for short periods by large amounts is adequately explained. If, for example, money can be employed in India at the high rate for one month only, even if the double cost of remittance for that period is so low as 1/16d., the difference between the London and Indian rates must amount to 5 per cent per annum to make a transfer of funds prima facie profitable.