The Hindu Business Line : For the RBI, some cues

Along with country’s largest bank, some others too have heeded the Finance Minister’s strong hints on softer interest rates. When the State Bank of India lowered its benchmark prime lending rate to 12.50 from 12.75 per cent early this week, Allahabad Bank, Canara Bank and Bank of India cut rates on home and retail loans. The reductions, welcome as they are, will reduce the debt burden marginally and may not contribute to a reversal of declining retail demand.

But the initiatives are significant from a monetary policy viewpoint. Despite popular expectations that the interest rates would turn softer, the RBI chose in January to stick to the status quo on the plea that rising food and fuel prices could upset a currently satisfactory inflation rate. Yet, the central bank offered hints both to the Finance Minister and banks to take a call on interest rates. Was the RBI, therefore, suggesting that an ad hoc reduction in interest rates would not have the same adverse effects on prices that a repo rate cut, for instance, could probably have? If the focus of monetary policy should be on its effects rather than the authorship, surely the RBI itself could have gauged the economy as one that needed softer rates? Or is that judgment also to be left to banks? Be that as it may, the current reductions, marginal as they are, are steps in the right direction.

The economy and industrial output are showing signs of exhaustion; while GDP rates peaked earlier, the Index of Industrial Production fell in November and December far lower than it did twelve months ago. Manufacturing has risen just 8.4 per cent compared to 14.5 per cent in December 2006. One could argue that output levels are cooling off from frenetic growth, but more likely, investment demand is moving far too ahead of consumption demand. Since the RBI’s own data bear this out, the drop in output could be linked to slipping consumer demand. The RBI’s Industrial Outlook Survey based on October-December data assessments, shows year-on-year decline in business expectations. More often than not, banks wait for signals from the RBI. Now, the apex bank could take cues from those nationalised banks that have ventured where it feared to tread and usher in an era of softer rates that might help counter the pessimism slowly but surely creeping over the economy.

Related Stories:
Chidambaram signals more credit for housing, consumer durables
SBI cuts prime lending rate by 0.25 percentage points
Canara Bank cuts BPLR by 25 basis points

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