The Hindu Business Line : Beyond rate cuts

Within a fortnight of the State Bank of India and two other banks heeding the Finance Minster’s call for a lending rate cut, some other nationalised banks have followed suit, with the SBI and Canara Bank further trimming their Prime Lending Rates. With two cuts, the PLR of SBI, the largest bank in the country, stands at 12.25 per cent, and those of the others that reduced rates at 12.75 per cent. The stock market did not respond well to the announcements, with bank s tocks falling on expectations of slimmer short-term earnings. From the borrowers’ viewpoint, however, the cuts are welcome. In Bank of India, the second largest lender after SBI, about half the Rs 83,000-crore domestic advances in its total loan book are to the commercial sector and Rs 10,000 crore are educational and retail loans, all of which will bear reduced rates. But loans to the priority sector of about Rs 10,000 crore, those not linked to BPLR and lending abroad will not be affected by these rate cuts.

At first glance, the Finance Minister’s advisory to bank chiefs could not have come at a better time. The year-on-year credit rate has slowed, and the incremental credit-deposit ratio, at 56 per cent, is way below last year’s 91 per cent. Acting on the assumption that credit growth fuels retail consumer demand, the main driver of current growth, the policy hint for a reduction would seem just the right medicine. The question is, however: Is the diagnosis right? Assuming retail consumer demand has been the engine of growth to date, then, should not the RBI have lowered its own rates to signal a cheaper money regime, a more effective antidote to slower credit growth than discrete attempts by banks to please targeted customers? So why has the RBI refused to soften its own rates? The central bank seems to fear the effects of oil and food inflation on overall prices more than high interest rates. If the apex bank is right, then the Finance Minister-inspired interest rate cuts may have little effect on the overall cost burden of households or producers supposed to benefit from the rate cuts.

The RBI data show that even though investment demand has been rising sharply over the past two years private consumer spending growth has been flat. Consumption rates have to accelerate through income generation that creates purchasing power among those who do not have it, not just through interest rate cuts. The solution lies not just in monetary but in public policy. Will the Budget do the needful?

Related Stories:
Funds get cheaper; SBI drops rates again
Union Bank, Bank of India cut lending rates by 50 bps
Chidambaram signals more credit for housing, consumer durables

More Stories on : Editorial | Interest Rates

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Beyond rate cuts

What to look for in the Finance Bill

Infrastructure financing: Issues and expectations

Extend the scope of Industrial Park Scheme, 2008

Extend 10A/ 10B benefit to BPO sector

Thirteenth Finance Commission — Unlikely to break new ground

Increase in prices of auto fuels — Taxing times for consumers

More tax incentives needed for R&D

Can TDS provisions be made less tedious?

Salaried require some tax breaks

Focus on agriculture