Piling the pressure on D Subbarao to bring down interest rates

Written by: Sunil Fernandes

Piling the pressure on D Subbarao to bring down rates
Skim through pink papers (business newspapers) or simply switch through business channels and chances are you end-up hearing what RBI Governor D Subbarao would do on April 17, 2012 – the day the RBI reviews the Monetary Policy.

Since January, there has been so much pressure on the RBI Governor to cut repo rates (interest rates), that it would be surprising if he holds repo rates steady. Bankers who met him earlier this week were vocal and urged the RBI Governor to cut rates by at least 50 basis points, forget the demand for 25 basis points. Now, bankers of course have their own interest in mind.

A cut in repo rates reduces interest rates and thus boosts their own net interest income and also reduces their non performing assets.

Industrialists have also been craving for rate cuts, as lower interest rates boosts profits directly. And of course equity investors too want interest rate cuts, as this helps to boost investor sentiments. Lower interest rates means larger amounts move into equities from fixed interest bearing assets. Also, improved profitability of companies gives a boost to share prices. Whether it's an investor or a banker or a corporate, each person has his own interest in mind and hence tends to pile pressure on the governor to cut rates.

But he has to consider the aam admi...

When inflation is high one cannot cut interest rates, as it would spur demand and result in an upward bias on inflation. For the aam admi when inflation is high and interest rates are low, his real rate of return turns negative. There are millions of retired employees who depend on interest income for sustenance and certainly lower rates are not in their interest.

Also, cut in interest rates generally tends to see inflation spiraling, which affects the common man. Already inflation in India is surpressed as petrol prices have not been increased. Should petrol prices increase it could have a cascading effect on inflation. Now governor Subbarao has to keep these things in mind as well before he decides to cut rates.

The past actions of the Governor have been extremely intelligent as he has cut the cash reserve ratio to improve liquidity, rather than cut rates. Cash reserve ratio is the amount of money banks have to keep with the RBI. When the CRR rate is cut the amount the banks need to keep with the RBI gets lowered and hence, they have larger amounts to lend.

On April 17, it is a given that RBI governor would cut rates. The only issue now is whether there would be a series of interest rate cuts, that has been the cry from industry for long. It looks doubtful given the big inflation variable in the interest rate matrix.


Read more about: crr, repo rate
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