Is the government looking at a benign interest rate regime after a year of hardening outlooks and fence-sitting?
A clear indication of this emerged on Friday from Finance Minister P Chidambaram's meeting with the bankers and a section of the industry. The minister asked the bankers to re-look at the interest rates in order to stimulate growth so that buoyant sentiment is sustained.
In his meeting with Chidambaram, bankers and industry representatives expressed concern over the slowdown in credit offtake and the possible impact of high interest rates on industry in medium to long term of two to three years.
A leading banker who attended the meeting said that the current cost of funds, perceived to be high, would have a detrimental effect in the next 18 to 24 months, particularly in the infrastructure and manufacturing sectors.
"The issue before the government is to strike a balance between the exchange rate, growth and inflation," said one banker.
However, the Reserve Bank of India has been maintaining that a lower interest rate may again fuel inflation, which at the wholesale level has been contained over the past year to about 3.3 per cent from 5 per cent levels.
In fact, bankers expressed their inability to bring down rates because of high repo and reverse repo rates that set benchmark rates and the Cash Reserve Ratio (CRR) that has squeezed out liquidity. Despite strong liquidity in the money market, banks are not in the position to bring down the rate as the effective cost of funds is high, bankers told the finance minister.
"There was unanimity in the meeting of a softer interest regime and I believe the Reserve Bank of India may reduce the repo rate by 25 basis points to give a signal to the market," said a leading banker on condition of anonymity.
Admitting that the rising rates were a matter of concern, Punjab National Bank chairman and managing director KC Chakrabarty said the finance minister had asked bankers to create positive sentiments. "We are operating at the lowest margin. We will try to find out ways and means how their problems can be addressed," he added.