Rangarajan Signals Low Interest Rate Regime

Reserve Bank governor C Rangarajan yesterday urged banks to reduce their spreads and keep interest rates low for borrowers, thus signalling a low interest rate regime.

The governors statement assumes significance after some institutions such as Industrial Credit and Investment Corporation of India said that cost of funds had been moving upwards. In fact its chief executive officer has stated that lending rates might have to be hiked if the cost of liabilities goes above 12 per cent at the short end. Industrial Development Bank of India, too, is facing resistance from investors for its 13.5 per cent five-year paper.

 

Speaking at the Indian Merchants Chamber on `Current Economic trends and Monetary Policy, Rangarajan emphasised that while the monetary policy will be supportive in bringing down interest rates, we also need to take note of certain other conditions that must be met.

Firstly, the governments borrowing programme will have to maintained at a level that does not put pressure on available resources. Secondly, nominal interest rate can come down only if the inflation rate remains at a reasonably low level. Thirdly, banks must take efforts to reduce the spread and pass on some part of the efficiency gains in the form of lower interest rate to the borrowers, he said.

Replying to the criticism that real interest rates in India are high, the governor said, there are difficulties in computing the real rates of interest. The real rate of interest computed on the basis of the consumer price index will not be as high as the one that uses the wholesale price index due to the substantial differences between the WPI and the CPI in the past two years, he said. Referring to the banks intervention in the foreign exchange markets, he said: With the increasing integration of the exchange and money markets in India, the focus of monetary policy has been on maintaining proper coordination between these two markets on a day-to-day basis for ensuring the objectives of inflation control and a competitive real exchange rate. Analysts said the market interprets this as an indication that the RBI would not to let the rupee appreciate.

He said: The interest rates have started declining. The outstanding amount of commercial paper witnessed a pronounced increase from Rs 702 crore as on April 15 to Rs 977 crore on May 15. The typical discount rate offered on commercial paper declined steadily from 11.25/12.25 per cent to 7.5/11 per cent during the same period.

The rate of 91-day treasury bills has declined from 12.37 per cent in May 1996 to 6.75 per cent in May this year. The rate of 364-day treasury bills has dropped from 12.94 per cent to 8.98 per cent. The yield on three-year government paper has declined to 12.14 per cent compared with 13.7 per cent in June 1996. The 10-year bond rates has also come down from 13.85 per cent last year to 13.05 per cent in 1997.