Sbi Follows Tarapore'S Prescription

The State Bank of India cut the prime lending rate.

But on the flip side, it must be remembered that the RBI governor C Rangarajan had said that the interest rates might stay high.

Tarapore had told financial intermediaries that it will be in their best interests to bring down interest rate structure both on the deposits and advances sides.

Addressing a seminar organised by the India Club, Tarapore had, on August 30, said: The financial system is caught in a dilemma. With the economy stretching at the leash the demand for funds continues to he high and as financial intermediaries compete for limited resources, there is a tendency to bid up the price of money.

 

Tarapore felt that in a progressively deregulated environment, financial intermediaries need to be sensitive to signals from the market.

It is clear that borrowers are cutting down credit demand from banks and financial institutions and there could well be a direct tapping of the market by corporates especially for short-term funds, Tarapore said.

It would in the best interest of financial intermediaries to reduce the interest rate structure on both their liabilities as well as assets and this would enable the interest rate structure to move to a level consistent with the lower inflation rate, he added.

The deputy governor stated yesterday that interest rates should move down in the near future to a level consistent with the lower inflation rates.

He further mentioned that quite clearly, an interest rate structure which was appropriate when the inflation rates were in double digits cannot be appropriate when inflation rates have been reduced by more than one-half.

However, contrary to what Tarapore had said, Rangarajan had forecast that the money market rates will rise, and that the government's difficult borrowing programme will keep pressure on interest rates