New Delhi: Finance minister P. Chidambaram said he would like banks to cut interest rates by half a percentage point to stimulate economic growth. “There is some sluggishness in consumer durable and non-durable sectors,” said Chidambaram, after meeting with the heads of India’s public sector banks in New Delhi to review their performance in the current fiscal.
Stability matters: Finance minister P. Chidambaram
“We should aim for stable interest rates and hope to moderate interest rates in the medium term,” he added.
The economy grew slower at 9.1% in the first half of 2007-08, after recording an 18-year high of 9.4% in 2006-07.
Following the minister’s comments, the yield on the 10-year bond fell to 7.70% in afternoon trade, the lowest since February 2007, from 7.76%.
Banks raised interest rates by 200-250 basis points in 2007, after the Reserve Bank of India (RBI) raised rates five times since June 2006 and tightened banks’ reserve requirements (or the balance they need to maintain with the central bank) through the year, limiting the funds available for loans.
Banks pay between 5% and 9% on deposits depending on the duration of the deposit. The prime lending rates of different banks are currently around 13%.
Bank lending has slowed, with credit growth moderating to an annual rate of 22.2% on7 December, down from 30% earlier in 2007 and below the central bank’s comfort zone of 24-25% for 2007-08.
An indication of where interest rates are headed would come after the RBI’s quarterly policy statement scheduled for the end of the month, said some heads of public sector banks who attended the meeting and did not wish to be identified.
Economists said the current interest rate regime would likely continue for a while as factors that RBI closely studies have not changed in the recent past to warrant a cut. “I don’t expect an explicit signal (from RBI) to cut rates,” said D.K Joshi, principal economist at credit rating agency Crisil Ltd.
The prevailing interest rates have not proved a threat to growth which continues to be robust, while inflationary expectations remain bothersome, said Joshi. As global crude prices have been rising without a commensurate increase in Indian retail petrol prices and rise in food prices has been worrisome, RBI is unlikely to signal a soft interest rate stance in the near future, added Joshi.
Joshi said industry did not seem bothered by the prospect of a slowdown in the economy as investment demand, which has been strong, takes into account a medium-term view of the economy.
Data for industrial growth in October 2007 released last month showed that investment demand continues to be robust. The capital goods segment grew by 20.5% in October compared with 6.5% a year ago. “For an overall growth of 9%, a 17-18% capital goods sector expansion is essential, so we’re still in line,” India’s chief statistician Pronab Sen said in an earlier interview.
Meanwhile, a committee headed by C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, that was appointed to suggest ways by which the process of financial inclusion could be hastened submitted its report to the government on Friday, said Chidambaram.
Financial inclusion is used to describe ways through which the section of the population outside the organized financial sector is brought within its fold.
Public sector banks on Friday agreed to open at least 250 new accounts in each branch every year, as recommended by the Rangarajan Committee, said Chidambaram. It meant that 12.5 million accounts would be opened each year, given the current strength of 50,000 branches in the country, he added.
Reuters and PTI contributed to this story.