The Telegraph
Since 1st March, 1999
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Conflict of choices on money menu
- Cheap-loan chants and depositorsí wails keep new RBI governorís plate full

Mumbai, Nov. 2: If thereís a tightrope-walking contest, Y. V. Reddy will give the best a run for their money. And, itís money that tests the new Reserve Bank governorís sense of balance when he decides whether to coddle already-pampered borrowers more (cheaper loans) or to sting investors again (deposit rate cut).

Whichever way he moves, his first mid-term review of the monetary policy will be aimed at giving the growth machine the right volume of cash lubricants.

The small borrowers and savers have different goals, as each differ in their wants. While borrowers have never had it so good, with declining interest rates for home loans and personal loans, the savers have been experiencing one of the worst periods with softening interest rates.

The jury is still debating whether the Reserve Bank will cut the bank rate, a benchmark rate at which the central bank lends funds to banks, and the cash-reserve ratio, a portion of deposits that a bank is required to keep with the RBI. The two tools enable the central bank to nudge banks to cut lending rates. Banks then follow it up with a drop in the deposit rates.

State Bank of India chairman A. K. Purwar has already hinted at a cut in deposit rates. He told an analystsí meeting he felt the bias towards soft interest would continue. He is concerned about the spreads between the lending and borrowing rates declining. It has already come down to 2.79 per cent from 2.95 per cent.

Perhaps, Reddy realises that this is the last time in the near future when he can cut the bank rate and the cash reserve ratio.

It is the last chance also to cut rates because inflation rates are inching up to 5-5.5 per cent, and any further reductions in deposit rates will get the depositorsí goat. Further, with five states in election mode, the government might not support an interest rate cut.

Bankers still hope that a quarter per cent cut in the bank rate is possible.

The Reserve Bank's role includes setting up interest rates for the banking system and regulating and supervising banksí public dealings.

According to bankers, the soft interest rate regime will have to continue as the gross domestic product (GDP) growth is picking up. For this, the RBI may offer a token cut.

One of the easiest acts for RBI in this mid-term review would be to revise the projections for GDP to 6.5 per cent from 6 per cent it had forecast in April.

The corporate captains have never been so upbeat. They have used the soft interest rates to cut borrowing costs which have boosted profits. Due to low interest rates, the festival season has seen a rising demand for consumer durables, automobiles and houses.

However, industry watchers also expect the RBI to take some hard measures like a single benchmark prime lending rate for banks. Banks may be prodded to adopt it as RBI fears that only a few borrowers have really benefited from the falling interest rates.

RBI's views on foreign exchange are keenly awaited as exports have been affected due to an appreciating rupee. Infotech companies will also be keenly watching the developments.

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