The Hindu Business Line : Toward easier interest rates?

In a meeting with bank chiefs last weekend, the Finance Minister advised them to soften both deposit and lending rates by half a percentage point and boost consumer spending in order to maintain the tempo of current growth. The advisory comes just weeks ahead of the Reserve Bank of India’s quarterly monetary policy review and a little less than two months before his Budget for the forthcoming fiscal. Most banks would hesitate to make any changes in bank rates with th e two most important policy announcements likely to set milestones for them to reach. So was Mr Chidambaram indirectly saying that the RBI was ready to take the first step toward easier interest rates? After all, the central bank sets the tone for banks, and for the past two years the movement has been upwards for both loans and deposits.

If indeed the Finance Minister was addressing the RBI, the timing couldn’t be better for a downward revision of benchmark rates, judging by the consistent decline in headline inflation to a little less than 4 per cent. This is way below the RBI’s tolerance level of five per cent. Admittedly food inflation is still high and crude oil prices, nudging $100 a barrel, are going to take their toll. As it is, the average Indian basket of crude oil cost $92.13 a barrel in November — up from $65.52 seven months earlier. Discounted domestic prices kept the economy from the shocks of the spikes but the government may not be able to afford that subsidy any longer. If domestic fuel prices do rise, the impact will be felt across the economy, even if targeted subsidies shelter the poor somewhat. In the event, any downward pressure on prices would be welcome and what better place to start than with interest rates?

While the Finance Minister has his heart in the right place — concern about blips in the economy’s steady climb — when he asks for a softer interest rate regime, banks need substantive cues, not mere pleas to alter their current direction. Non-food credit growth till October 2007 dipped to 23 per cent from 30 per cent in the corresponding previous period while deposit growth has been more robust. So far, manufacturing has, on average, maintained its growth impetus; business confidence is high but largely on account of strong capital inflows, ECBs and equally a strong primary issues market that underwrites capacity creation. But small enterprises with the potential to grow and little means to do it need credit too. Softer interest rates would help them and channel the excess liquidity into productive ventures.

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Chidambaram for lower rate regime

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