It is not to the banks’ credit | india | Hindustan Times
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It is not to the banks’ credit

india Updated: Apr 21, 2009 22:04 IST
Hindustan Times
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The sixth cut in the short-term lending rate by the Reserve Bank of India (RBI) in as many months is accompanied by widespread pessimism that it is not percolating to the end user. The repo rate, at which the central bank lends overnight money to banks, at 4.75 per cent is now half of what it was in October 2008. The increased liquidity is being used by risk-averse banks to lend mainly to their most credit-worthy borrower: the government. Since October growth in bank lending to companies and individuals has slowed from 15 per cent to 3 per cent in March.

Signals from the RBI, like the one on Tuesday, remain largely unheeded—private banks are charging their prime customers upwards of 15 per cent interest; their state-owned rivals have brought their rates down a tad more, after some not-so-gentle persuasion from the government. Bank lending rates are tied to deposit rates, a floor for which is provided by the 8 per cent tax-free interest Indians earn from their savings with post-offices. Suggestions to prick the liquidity build-up in the financial system have ranged from the central bank making deeper cuts, thereby shortening its rate-easing cycle, to quantitative restrictions on how much money banks can park in gilts and at the reverse repo window. The argument—remove the perverse incentive not to lend—is tempting but would run counter to both the central bank’s measured monetary response to the global recession and the need, as the government’s banker, to bankroll its Rs 362,000 crore borrowing programme.

The expansionary fiscal policy is likely to result in a GDP growth rate of 6 per cent in the year to March 2010. The first officially articulated projection, in the RBI’s annual policy statement, is justifiably cautious. RBI Governor Duvvuri Subbarao has elaborated on this earlier: the previous fiscal year had two good quarters; unless the world revives in the next two, the prospects for 2009-10 will necessarily be bleaker. Benign inflation provides the RBI policy space on rates, which central banks in large parts of the world have exhausted. It should come as some comfort that Mint Road has not had to look for options beyond interest rates at this stage of the game.

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