India unlikely to move towards zero interest rate

India unlikely to move towards zero interest rate
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First Published: Thu, Oct 30 2008. 04 49 PM IST
Updated: Thu, Oct 30 2008. 04 49 PM IST
New Delhi/New York: The latest interest rate cut in the US has sparked speculations that a number of major economies across the world, including the US, Japan, England and Australia, are moving towards a zero-per cent regime, but bankers differ about India.
The rates have not been below the current level of 1% in the US in the past five decades, but Japan had kept a 0% rate policy for most of the time since 1999 till March 2006.
The US central bank, the Federal Reserve on Wednesday cut its benchmark rate by 50 basis points to 1%, while the Bank of Japan is meeting tomorrow to review its rate. There are expectations for a cut in Japan’s rate from its existing level of 0.5% - which is already the lowest for any industrialised economy in the world.
While expectations are building up for further rate cut in India as well, the bankers here believe that a zero-level rate does not seem likely even remotely.
“That (0% interest rate) looks very difficult in India. Given the liquidity situation and macroeconomic factors, interest rate below one per cent seems a highly unlikely proposition,” UCO Bank Chairman and MD S K Goel said.
But, it is not the case with the US and Japan, as well as some other economies where a zero-interest rate is being talked as quite a possibility in the current economic scenario when borrowers are hard to find and liquidity is not enough.
Under a zero interest rate policy, which is also known as Quantitative Monetary Easing Policy, a central bank uses money supply, rather than interest rate, as the main monetary easing tool.
When Japan slashed its benchmark rate to 0% for five years between 2001 and 2006, it was mainly to fight deflation concerns and revive economic growth.
However, a zero benchmark rate does not guarantee nil interest cost for consumers or corporate borrowers. It applies only to the banks parking their funds with the apex bank and borrowing from each other. The interest rates applicable to the consumers and corporate customers, however, tend to decline considerably in such a scenario.
The expectations for a zero rate are getting a boost from the fact that central banks across the world are nowadays taking concerted efforts to cut their benchmark rate in a bid to fight the global credit crisis.
At least a dozen major central banks across the world have slashed their benchmark rates to sub-5% level in the past few days, while more rate cut decisions are expected after Fed’s decision on Tuesday night.
Prior to this, Fed had cut its rate to 1.5% on 8 October in a coordinated move with many other central banks across the world, including Bank of England, European Central Bank, Swiss National Bank. It has been followed by rate cuts in Canada, China, Hong Kong, India, Korea, New Zealand, Taiwan, Norway, Slovakia and Sweden so far this month.
However, Hungary and Iceland raised their rates from 8.5% to 11.5%and from 12 per cent to 18% respectively, over the last week.
While Japan may announce a rate cut tomorrow, meetings for discussing interest rates of the Reserve Bank of Australia and European Central Bank are scheduled on November 4 and 6, respectively.
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First Published: Thu, Oct 30 2008. 04 49 PM IST
More Topics: Market Crisis | Zero | Interest | Rate Cuts | Fed |