The Telegraph
Since 1st March, 1999
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FM promises benign rate regime
Reserve Bank to help boost investment

New Delhi, March 5: The government has asked the Reserve Bank of India to help boost investments by maintaining 'benign' interest rates.

Finance minister P. Chidambaram said here today: 'I have requested the RBI board to ensure that interest rates remain benign and helpful for investments and that banks become competitive and efficient.' He was speaking after a meeting with the board.

The bond market rose soon after the comment. The benchmark 7.38-per-cent bond due on September 2015 rose 0.65 per cent, or 65 paise per 100-rupee face amount.

The RBI has maintained interest rates at a 32-year low since April 2003, helping boost GDP growth to its fastest in 15 years in the last fiscal and to a healthy 6.9 per cent this fiscal, despite poor monsoon rains hitting farm growth.

The minister asked the RBI board to ensure farmers and corporates get loans from banks at 'competitive rates'. The meeting discussed aspects in the budget that would impinge on the central bank's monetary policy.

Chidambaram told the central bankers he expected banks to become more competitive and efficient and lower their interest spread which, he felt, were still too high.

The RBI's benchmark bank rate now stands at 6 per cent, while loans to blue-chip corporates are going out at between 6.5 per cent and 7.5 per cent. A nominal 6.5 per cent loan means a loan at a real interest of 1.5 per cent only.

With inflation at about 5 per cent, the central bank has little headroom to reduce lending rates further. Lower lending rates would also mean lower deposit rates which are now hovering between 6 to 6.25 per cent.

Any significant cut in this rate could mean depositors would earn less than 1 per cent real return from money invested, something which could act as a disincentive to savings.

Economists say the RBI could at most signal rate cuts of about a quarter percentage point at this stage.

At the meeting that lasted one and a half hours, Chidambaram also asked the RBI to ensure that inflation was kept in check. 'I have promised to work with the RBI board to ensure that there is price stability and that inflation is kept under control,' he said.

The RBI uses the interest rate mechanism to suck up excess liquidity in the system whenever inflationary tendencies show up in the economy.

Wholesale price inflation rose 4.83 per cent, the slowest in about nine months, in the week ended February 19 from a year before, compared with 5.01 per cent in the preceding week.

The low inflation-low interest rate comes at a time when the country's forex reserve spurted further by $2.699 billion to a record high of $135.658 billion during the week ended February 25. 'All this places us in a comfortable situation to take decisions on a lower interest rate,' said a finance ministry official.

Besides the foreign fund inflows, appreciation of the non-US currencies like euro, pound sterling and yen held in the country's reserve, helped the forex reserve to maintain an upbeat trend.

Chidambaram explained to the central bank's board the government's constraints in raising more revenue and the added burden of transferring more money to states in accordance with the Twelfth Finance Commission report.

'In these circumstances, the government could meet its fiscal deficit reduction targets to a large, though not full, extent but had to pause on the revenue deficit cuts,' he said.

'The government would, however, strive to borrow less than the budgeted amount this year.'

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