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Living in interesting times

india Updated: Oct 12, 2007 01:40 IST

The interest rate cuts by the country’s two biggest banks on the eve of the festival season is a welcome move — for customers, for durables makers and for the banks themselves. Unprecedented credit-fed consumption demand has been powering the economy to growth rates of over 9 per cent and any slacking could show up in the GDP numbers. Evidence abounds that a drift has set in: a wide swathe of industries from automobiles to white goods are reporting slowing sales growth after interest rates climbed to a new peak in the middle of this year. So this week’s cuts by the State Bank of India and the ICICI Bank are good for business all around.

But it would be premature to see this as a cyclical downturn. The Reserve Bank of India paused its rate hike cycle in July after raising short-term interest rates six times in 18 months. That was then seen as a signal that interest rates had peaked. A simple calculus, and easily overturned by the US Federal Reserve lowering its key rate by half a percentage point in September as a lifeline to global markets, seized up on the sub-prime mortgage crisis. The ensuing tide of dollars that has inundated the faster growing Asian markets — the Sensex has climbed a mind-boggling 3,000 points as foreign funds pumped in $ 6.6 billion since the Fed rate cut — is pushing up local currencies and threatening the competitiveness of the continent’s economic lifeline: exports. On current indications, the RBI’s options are tilting in favour of a rate hike at its next review meeting later this month. This, more than anything else, is the signal banks are waiting for.

The festival discounts are, however, fortuitous for a government trying to talk down interest rates. A week after Finance Minister P. Chidambaram asked bankers to buoy up sentiment, the market leaders have taken the hint and other banks are likely to follow with rate cuts of their own. In the past, bankers have baulked at Mr Chidambaram’s suggestions to act out of step with cues emerging from Mint Road.