Interest Rates To Remain Low For 6 Months: Rangarajan

The Reserve Bank of India (RBI) expects interest rates to remain low for the next six months. In an exclusive interview to Business Standard, RBI governor C Rangarajan said he expected commercial banks to reduce their lending rates following the RBIs decision to reduce the bank rate by 100 basis points from 11 per cent to 10 per cent.

I believe that all banks will make downward adjustments in their lending rates, said the governor. However, he clarified that different banks may reduce their rates to a different extent, depending on their estimate of cost of funds.

Explaining the rationale behind the bank rate cut, Rangarajan said: Plenty of liquidity in the banking system and a decline in inflation rate necessitated a reduction in interest rates, and we have used the bank rate reduction to send out the signals.

 

Rangarajan added that the RBI feels that the time is appropriate for a reduction in interest rates. Accordingly, the central bank decided to reduce the deposit rate on maturities of up to one year and the post-shipment rupee credit rate, in addition to the bank rate.

The interest rate has been declining for some time and that on the government paper has perceptibly dropped. In case of treasury bills, the rate has dropped from over 12 per cent last year to about 7 per cent this year. There is thus a clear declining trend in interest rates. Given the liquidity in the system, they can go down further. And the bank rate has been used as a signalling device, said Rangarajan.

Ruling out the possibility of other instruments, such as a reduction in cash reserve ratio (CRR), being used for this purpose, the RBI governor said: There is no scope for a reduction in CRR at a time when deposits of banks are increasing at a fast rate. An important contributory factor to the large accretion in money supply has been the foreign exchange reserves. We started the year with $23.5 billion and have already reached $25.5 billion. The reserve money is expanding and as a consequence the deposits are also expanding. Between March 31, 1997 and June 6, the growth in deposits has been of the order of Rs 14,112 crore, against Rs 3,856 crore in the corresponding period last year. Since deposit growth has been strong, we thought the use of bank rate would be appropriate.

The extent of reduction in lending rate will also depend to some extent the non-performing assets (NPAs) of individual banks, but the direction will be the same. All banks, whether weak or strong, have experienced an increase in their deposits and their lendable resources have gone up. So they will tend to reduce lending rates to increase their lending, felt Rangarajan.

On being asked whether demand for credit would pick up as a result of reduction in lending rates, Rangarajan answered, Demand for credit depends on a number of factors. Cost of credit is an important factor and I am confident that demand for credit will pick up as a result of reduction in lending rates. In a situation of high liquidity, the cut in lending rate will be an additional factor affecting demand for credit, he added.

However, there is plenty of money in the system and a pick up in demand for credit will not push up the interest rates, he added.

The RBI governor expressed concern at the slow exports growth. While the current account deficit is comfortable at 1.2 per cent, exports have only increased by 4 per cent in dollar terms, he pointed out, adding that export growth is important because it provides an important source of demand for products. Export is, therefore, an area of concern but export growth cannot be explained merely in terms of interest rates.

There is a clear declining trend in interest rates. Given the liquidity in the system, they can go down further. And the bank rate has been used as a signalling device

RBI governor C Rangarajan