FinMin figures show interest rates hardening considerably

FinMin figures show interest rates hardening considerably


New Delhi: Reflecting hardening interest rates scenario in the country, a Finance Ministry report has said prime lending rates of five major banks were ruling at 12.75-13.25% as on 17 August as against 10-11.50% a year ago.

Deposit rates stood at 8-9.5%, compared to 6.25-8% as on 18 August 2006, the report for the month of August stated.

The increase in interest rates has curtailed the demand for consumer durables, analysts say.

“Higher interest rates have not dampened business investment as a very buoyant long-term economic outlook has outstripped a cyclical rise in borrowing costs," but would discourage consumer spending, Asian Development Bank has said in its latest report on Asian Development Outlook.

Interest rates hike also resulted in a slowdown in the pace of construction activities, it stated.

Industrial growth declined to 7.1% in July 2007, compared to 13.2% a year ago. Cumulative growth in April-July saw a decline to 9.6% from 11.1% in the corresponding period last fiscal.

The biggest casualty to the fall in demand was the manufacturing sector which registered a dampening of growth to 7.5% in July from 14.3% a year ago.

Moderation in demand notwithstanding, ADB has revised upwards its projections for Indian economic growth to 8.5% for 2007-08 and 2008-09, against its earlier forecast of 8% and 8.3% respectively.

The industrial slowdown has, however, prompted business chambers to ask the RBI to ease its stance saying higher interest rates are affecting the investment environment in the country.

At the outset, it seems that RBI has conducive environment to lower interest rates as wholesale prices-based inflation fell to a 17-month low of 3.52% for the week ended September 1 due to cheaper minerals, fuels and some manufactured products.

However, analysts feel RBI would maintain status quo in the interest rate regime, given the high oil and commodities prices in the domestic and global markets.

“I think, the RBI would pursue a wait-and-watch policy and tight monetary stance will not moderate immediately," Crisil principal economist D K Joshi has said.

Prime Minister’s Economic Advisory Council Chairman C Rangarajan has also advised RBI to cut interest rates only after seeing a firm trend in price levels.

Asian Development Bank has also warned that inflation risks persist and any shock to food prices could stoke price pressures. It forecasts the inflation rate to remain steady at 5% in both fiscal year 2007 and 2008.

According to the Finance Ministry’s report, inter-bank call money rates, however, have come down to 4.75-5.50%, against 5.25-6.25% on borrowing side and 4.75-5.50% from 5.25-6.25% on the lending side.

As the report relates to the month of August, it has not captured the latest trend in the call money market. Call rates rose to 7.5% yesterday with advance tax payments by corporates leading to tightening of cash conditions in the banking system. Analysts feel that call rates will continue northward movement all through this week.