‘Interest rate cuts will not lower cost of borrowing’

RBI Governor Raghuram Rajan said India Inc should stop complaining about high interest rates when the problem was one of high inflation to which they also contributed.

In an interview to Business Line, Rajan was emphatic that the problem today was about inflation and not interest rates.

He argued that even if he had cut interest rates there will not be an iota of change to the cost of funding for corporations, as banks needed to pay their depositors a higher rate of interest in view of inflation.

“At 9.87 per cent CPI inflation, banks are barely meeting that by giving you 9 per cent on your deposits. Are they going to cut it (deposit rates) today, if I cut interest rates? No, they will just ignore my interest rate cut and continue paying the deposit rates. Deposits are their biggest source of their funding costs.”

Rajan lobbed the ball squarely back into corporates’ court by saying that corporations complaining about interest rates being too high, had to contribute their bit to bringing inflation down and put their house in order. This, he said, would help boost demand, and as inflation comes down, the RBI will have the room to cut interest rates.

“We don’t have a magic wand that we can wave and say that your interest costs will go down, they won’t. If I cut interest rates for a day, the markets will celebrate. Next day, they will wake up and say, look cost of funding is too high and it is not going to change.” He pointed out that his predecessor Subbarao had cut interest rates, but it wasn’t transmitted because inflation was high. “We already have an experiment. I am not talking through my hat… To ask us to cut interest rates, I think, is not in the economy’s interest at this point.”

Asked about what needed to be done to revive growth, Rajan said the revival of stalled projects was the first priority, and lauded the work of the Cabinet Committee on Investments (CCI) in this regard.

Reviving projects

He mentioned the case of a leading industry house whose ₹30,000-crore plant was stuck due to delay in grant of permissions for a 20-km pipeline. This has now been fast-tracked, thanks to CCI intervenion, and the plant is expected to start next month.

“I am seeing the beginnings of a revival in large projects that were stalled, with the CCI coming on stream. That, to my mind, is very heartening. We have to work on it.” The critical factor in getting growth up is to get investment back. “Once you get investment, the rest will follow. People will be happy about the economy, jobs will come, people will spend. Let’s get corporate investment going,” said Rajan.

He said the drop in corporate investment as a percentage of GDP from 17 per cent to 10 per cent showed the seriousness of the problem.

(This article was published on January 30, 2014)
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