New Delhi: India needs to cut interest rates further as two reductions in less than a month haven’t been enough to make loans affordable for companies and consumers, former Reserve Bank of India (RBI) governor Bimal Jalan said.
Policymakers should lower benchmark rates further “if necessary” to enable banks to cut their loan rates, Jalan, the top official at RBI from 1997 to 2003, said in an interview on Monday in New Delhi. Measures taken by the central bank and the government in the past month have helped bring the crisis “under relative control”.
Rate concerns: Bimal Jalan says he is in favour of of further reducing the cash reserve ratio and the repurchase rate, if necessary. Ramesh Pathania / Mint
The global financial crisis has led to a shortage of money in India’s banking system, affecting lenders’ ability to extend loans to companies and individuals. That’s eroding consumer demand and has prompted production cuts at firms including Ashok Leyland Ltd, the nation’s second biggest maker of commercial vehicles, and JSW Steel Ltd.
Demand for domestic loans increased after funds dried up overseas following the seizure in credit markets and the collapse of Lehman Brothers Holdings Inc. on 15 September. State Bank of India, the country’s largest commercial bank, cut the rate it charges its best clients to 13% last week from 13.75%, the highest in a decade. ICICI Bank Ltd, the second biggest bank, hasn’t reduced its 17.25% charge.
“We need to create conditions so that loans are available at interest rates at pre-crisis levels, as other sources of finances have dried up,” said Jalan, 67. “I am in favour of further reducing the cash reserve ratio and the repurchase rate, if necessary.”
India’s $1.2 trillion (Rs57.12 trillion) economy may expand at the slowest pace in four years, the central bank estimates, as the credit crisis tips the world’s industrialized nations into a recession. Larsen and Toubro Ltd, the country’s biggest engineering firm, said its borrowing costs will climb in the next six months and DLF Ltd, India’s largest developer, last week said its hotel venture with Hilton Hotels Corp. may be delayed by up to 18 months as it tries to secure funds.
The Sensex, India’s bellwether equity index, has declined almost 50% this year on concern slowing demand will hurt companies’ profits.
RBI cut its benchmark repurchase rate by 1.5 percentage points in two stages starting 20 October to 7.5% from a seven-year high of 9%. It also lowered the amount lenders must set aside as reserves to cover deposits by 3.5 percentage points in a month, freeing up as much as Rs1.4 trillion in cash to ease lending.
“The action taken by the Reserve Bank seems to be absolutely appropriate,” the Cambridge and Oxford-educated Jalan said. “The most important thing is giving assurance to all the players that a line of credit is available at a price before all the shakiness started.”
Higher borrowing costs and prices have discouraged spending by consumers who rely on loans to buy cars and motorbikes. Passenger car sales in India fell 6.6% in September, the most in more than three years, the Society of Indian Automobile Manufacturers said this week.
Vehicles sales, also including trucks, two-wheeled scooters and motorcycles, tumbled 14%, the biggest drop in almost eight years, the automobile grouping said on 10 November. India’s industrial production growth grew 1.3% in August, the slowest pace of expansion on record.
Cooling inflation has given the central bank more room for interest rate cuts, Jalan said. India’s inflation rate, measured by wholesale prices, slowed to a five-month low of 10.68% in the week ended 18 October because of waning consumer demand and a decline in commodity prices.
“Circumstances are good as far as inflation is concerned,” he said. “If you see a spiking of inflation, then your options become limited.”