Interest rates unlikely to come down further
The Times of India, March 27, 2009, Page 23
‘Govt Borrowing For Stimulus Hampering RBI’s Efforts, 0.27% Inflation Won’t Help’
Prabhakar Sinha TNN
New Delhi: The stimulus packages offered by government to fight the impact of global recession on Indian economy seem to be backfiring. At present, it is discouraging the efforts of RBI to bring down the interest rates to revive demand in the domestic market.
On Thursday, interest rate on 10-year government bond scaled the 7% mark to touch 7.02%. The rate had fallen to 4.86% in January 2009. The interest rates firmed up as the government announced that it would borrow Rs 2,41,000 crore in the first six months of 2009-10 to fund stimulus packages. Government would borrow Rs 48,000 crore every month in the first quarter and Rs 32,000 crore every month of the second quarter, which is putting pressure on interest rates.
Indian Bank's Association chairman TS Narayansami said this huge government borrowing programme is creating upward pressure on interest rates. So, RBI's step to cut its short term lending rate to banks (repo rate) will not help in bringing down the rates, he added.
Meanwhile, RBI governor D Subbarao at a CII conference said he was talking to various banks to understand why the lending rates are not coming down despite the central bank has cut the key rates. ‘‘Policy rates have to be transmitted to lending rates by banks. We are looking into the transmission mechanism,'' Subbarao said. He added that interest rates should soften for India to become competitive. Fall in lending rates will revive the demand and so the economic activities.
However, bankers feel that the softening of interest rate is no more linked to cut in key policy rates. Narayansami said, ‘‘RBI's repo rate cut will not have any effect as the interest rates on government bonds are firming up.'' This means, even if RBI reduces the policy rates, taking advantage of inflation touching zero, it will not bring down the interest rates in the present condition.
ICICI MD KV Kamath also said that firming up of the interest rates on government bond is not allowing lending rates to come down. Because of rise in the bond rates, cost of funds is not reducing, prompting banks to hold interest rates at higher levels.
As the government's spending as part of the stimulus packages would be financed from the borrowed money, this will affect availability of funds to the private sector and create upward pressure on interest rates.
In the current financial year, government's borrowing has increased to Rs 3,26,000 crore as again the budgeted amount of Rs 1,33,000 crore. In the 2009-10 also, government will have to borrow around Rs 3,40,000 crore to fund revenue shortfall.
Bankers are arguing that RBI should buy bonds from the market and inject money into the system. Narayansami said instead of cutting the policy rates, RBI should pump more money by purchasing government bonds from the market. As the inflation has already fallen to 0.27% during the week ending March 14, the government can inject liquidity without worrying about the inflation. This would only help in bringing down the interest rates, bankers said.
The Times of India, March 27, 2009, Page 23
‘Govt Borrowing For Stimulus Hampering RBI’s Efforts, 0.27% Inflation Won’t Help’
Prabhakar Sinha TNN
New Delhi: The stimulus packages offered by government to fight the impact of global recession on Indian economy seem to be backfiring. At present, it is discouraging the efforts of RBI to bring down the interest rates to revive demand in the domestic market.
On Thursday, interest rate on 10-year government bond scaled the 7% mark to touch 7.02%. The rate had fallen to 4.86% in January 2009. The interest rates firmed up as the government announced that it would borrow Rs 2,41,000 crore in the first six months of 2009-10 to fund stimulus packages. Government would borrow Rs 48,000 crore every month in the first quarter and Rs 32,000 crore every month of the second quarter, which is putting pressure on interest rates.
Indian Bank's Association chairman TS Narayansami said this huge government borrowing programme is creating upward pressure on interest rates. So, RBI's step to cut its short term lending rate to banks (repo rate) will not help in bringing down the rates, he added.
Meanwhile, RBI governor D Subbarao at a CII conference said he was talking to various banks to understand why the lending rates are not coming down despite the central bank has cut the key rates. ‘‘Policy rates have to be transmitted to lending rates by banks. We are looking into the transmission mechanism,'' Subbarao said. He added that interest rates should soften for India to become competitive. Fall in lending rates will revive the demand and so the economic activities.
However, bankers feel that the softening of interest rate is no more linked to cut in key policy rates. Narayansami said, ‘‘RBI's repo rate cut will not have any effect as the interest rates on government bonds are firming up.'' This means, even if RBI reduces the policy rates, taking advantage of inflation touching zero, it will not bring down the interest rates in the present condition.
ICICI MD KV Kamath also said that firming up of the interest rates on government bond is not allowing lending rates to come down. Because of rise in the bond rates, cost of funds is not reducing, prompting banks to hold interest rates at higher levels.
As the government's spending as part of the stimulus packages would be financed from the borrowed money, this will affect availability of funds to the private sector and create upward pressure on interest rates.
In the current financial year, government's borrowing has increased to Rs 3,26,000 crore as again the budgeted amount of Rs 1,33,000 crore. In the 2009-10 also, government will have to borrow around Rs 3,40,000 crore to fund revenue shortfall.
Bankers are arguing that RBI should buy bonds from the market and inject money into the system. Narayansami said instead of cutting the policy rates, RBI should pump more money by purchasing government bonds from the market. As the inflation has already fallen to 0.27% during the week ending March 14, the government can inject liquidity without worrying about the inflation. This would only help in bringing down the interest rates, bankers said.
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