Raise interest in cutting rates | india | Hindustan Times
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Raise interest in cutting rates

A one-year freeze on interest rates for home buyers at around 3 percentage points below the market by the country’s largest bank should be good augury for easier credit later in the year.

india Updated: Feb 03, 2009 22:02 IST

A one-year freeze on interest rates for home buyers at around 3 percentage points below the market by the country’s largest bank should be good augury for easier credit later in the year. Interest rates are, indeed, headed down. Where the State Bank of India’s scheme flatters to deceive is they are not doing so fast enough, at least not as fast as the government would have liked. Other State-owned banks came away from the now customary meeting with their owner making guarded comments of prime lending rates being lowered by up to 2 percentage points. The central bank has made its intention clear in its latest credit policy: it will not cut rates further till the money it has pumped into the economy since October flows out to the end user.

A considerable part of the Rs 3.9 trillion injected by the Reserve Bank of India in the aftermath of the global credit squeeze is caught up in the banking system. The State Bank of India’s treasury income jumped 51 per cent to Rs 6,000 crore in the previous quarter. Likewise, at ICICI Bank, its next biggest rival, the non-lending business grew three-fold from a year ago. Despite rising bad debts, Indian banks have put out decent profit numbers in October-December 2008 by holding on to government securities that posted their biggest quarterly gains in a decade. This ‘lazy banking’, apart from symbolising a flight to security, is reinforced by one-way bets on the direction of policy rates. The perverse incentive for parking money in gilts would dissipate if the central bank signalled that it had reached the end of its rate-easing cycle but with the economy sputtering and inflation heading towards 3 per cent by March, we are quite some distance from that end point.

Till then, monetary expansion will have to leech out through commercial banks, some of which still have prime rates in the region of 12-16 per cent. Their argument — that the price of raising deposits will have to fall drastically before lending rates can be brought down — will continue to govern the cost of money for households and companies.

Directed subsidised credit for retail consumers, like the State Bank of India scheme, can momentarily dispel the gloom but cannot hope to revive animal spirits brought low by expensive credit.