Banks, Fis Divided On Nominal Rate Cut

Senior executives of commercial banks such as United Bank of India and Allahabad Bank said they favoured arresting the rising inflation rate before a cut is effected in interest rate. Non-bank finance companies such as Kotak Mahindra Finance and Srei International Finance said a growing economy can survive a slightly high inflation rate, and said rate cuts should come immediately regardless of the rising inflationary trend.

The annual rate of inflation which gained 0.23 percentage points to touch a 37 week high of 6.25 per cent has been closing in on the nominal interest rates, thus bringing real interest rates down. The inflation rate has gone up for six consecutive weeks.

 

United Bank of India chairman and managing director, Biswajit Choudhuri, speaking to Business Standard said, Inflation will go up in the three month, six month and 12 month terms unless measures to arrest inflation are taken.

Inflation, Choudhuri feels, needs to be controlled before banks can be asked to go in for a nominal interest rate cut.

On the other hand, Sunil Kanoria, director of Srei International and Keya Sarkar, senior vice president of Kotak Mahindra Financial Services feel that to an extent, even a budget deficit can act as a spur on growth.

Manmohan Singh has shown how a deficit can act as multiplier to a limited extent: A relatively more drastic action of cutting interest rates even in the face of rising inflation is not necessarily wrong, said Sarkar.

Choudhuri, however, added that if there was to be a cut in the nominal interest rates on advances, there would have to be a proportionate cut in the rates of interest on deposits as this would otherwise affect the spread of banks.

Though a cut in the CRR would not be of much significance, it would help the manufacturing industry emerge more competitive internationally, added Choudhuri.

A senior source at Allahabad Bank shares the same views as Choudhuri but he added that this year's kharif crop would be a major determinant in the context of inflation.

If the crop this year is bad, the inflation rate is going to soar. However, considering that the country overall has had a good monsoon, the crop should be good.

Sarkar has another reason for high inflation projections: A possible repeat of the last year's flopped PSU disinvestment programme, which will upset budgetary mathematics. Inflation is a strong possibility under those circumstances, she said.