Banks can reduce lending rates further: Subbarao

Reserve Bank of India (RBI) Governor D Subbarao today said there was still scope for banks to reduce lending rates further.

“Given the current economic context, and given the policy initiatives of the RBI, there is a considerable scope for banks to reduce lending rates,” he said.

This is despite the fact that banks have already reduced lending rates by 50 basis points to 250 basis points which expanded bank credit, he added, while delivering the keynote address on ‘India and the Global Financial Crisis: Four Questions’, which was organised by the Karnataka chapter of the Confederation of Indian Industry here.

Subbarao also used the opportunity to point out that the several fiscal stimulus packages formulated by the government, together with monetary accommodation and counter-cyclical measures announced by the central bank, have started showing revival signs.

The RBI brought down the reverse repo rate by 575 basis points from 9 per cent to 3.25 per cent in the last few months, he said. With these measures in place, the RBI expected a growth rate of 6 per cent for 2009-10 and WPI-(wholesale price index) based inflation to reach 4 per cent by March 2010, he said.

“It is true that the Indian economy is slowing and exports have declined, services sector is decelerating, investment demand is on the decline and corporate margins are dented. However, growth moderation is steeper than thought earlier. The cyclical downturn was natural after four years of high growth. But, a growth of 6 per cent is certain,” Subbarao said.

He added that India’s economic recovery would be swifter and sharper than any other economy. But he was also quick to add that for India to recover the world has to recover. The challenge before the country is to minimise the pain of adjustment.

“We are not a demand-constrained economy. Once confidence is restored, there will be a faster recovery. However, we are a supply-constrained economy. Investment in manufacturing, infrastructure and services sectors needs to increase,” the RBI governor added.

Subbarao also said that there were some challenges ahead for India on the path to revival too.

“We should support the drivers of aggregate demand, increase private investment, maintain credit flow and credit quality, restore fiscal consolidation, manage government programming and implement fiscal stimulus vigorously. There is indeed enough money in the system for private demand to pick up,” he said.

Further, he said there were some positive features, such as normally functioning financial markets, the decline in inflation, comfortable foreign exchange reserves, a robust rural demand and social safety, an automatic stabiliser, which point to revival.