Rbi Chief Hints At Easing Of Interest Rates

Speaking at the Administrative Staff College of India (ASCI) in Hyderabad yesterday the governor said Nominal interest rates adjust to changes in inflation rate only with a lag. The rates of interest have currently started showing a decline. After the cash reserve ratio (CRR) cuts availability of credit is no longer a problem, he pointed out.

However he stated, There are still concerns about the cost of credit, interest rates have remained high due to the pressure on resources coming from all segments of the economy.

Real interest rates stay high whenever inflation rate falls sharply.

Citing examples he said in 1977-78 when the inflation rate came down to zero from 11.9 per cent in the preceding year, the lending rate remained at 15 per cent with a consequent real rate of interest of 15 per cent. A similar situation prevailed in the year 1981-82.

 

Rangarajan said the rates have finally begun showing a decline. The 91-day treasury bill rate came down from 12.79 per cent on April 4 to 10.17 per cent on October 4 and declined further to 8.16 per cent on November 22. Similarly, the 364-day treasury bill rate come down from 13.12 per cent on April 10 to 12.61 per cent on July 17 an d further to 10.21 per cent on December 4.

Reserve Bank governor Rangarajan said the cash reserve ratio cut will have the effect of expanding the lendable resources of banks as well as bring down the cost of credit.

The Reserve Bank governor said the appropriateness of money aggregates as an intermediate target can be justified on several grounds. First, since the money demand function for India has remained reasonably stable and continues to predict price movements with reasonable accuracy over the medium term, there is no compelling reason as yet for abandoning monetary targeting.

Secondly, a money stock target is relatively well understood by the public. With a money supply target, the monetary policy stance is unambiguously defined and gives a clear signa l to market participants, which helps in the formation of market expectations.

The governor said in developed economies an alternative to monetary targeting has been the interest rate, primarily since interest rates in these countries play a more important role in equilibrating markets.

The various segments of the financial markets are closely integrated with interest rates in various markets, mutually influencing one another. This is hardly the case in India, which makes interest rate targeting unviable.