Banks would lower lending rates as the government on Thursday decided to provide additional funds to the PSU banks to enable them financing of auto and consumer goods purchases.
The decision to increase the quantum of capital infusion to the banks was taken at a meeting between Finance Minister P Chidambaram, RBI Governor Raghuram Rajan and Economic Affairs Secretary Arvind Mayaram here.
"This amount (Rs 14,000 crore provided for capital infusion in Budget) will be enhanced sufficiently. The additional amount of capital will be provided to banks to enable them to lend to borrowers in selected sector such as two-wheeler, consumer durables, etc at lower rates in order to stimulate demand," a finance ministry statement said.
Chidambaram said he would be meeting heads of PSU banks soon to impress upon them on the need to lower interest rates for select sectors.
"Lower interest rates will depend on the lending capacity of banks. Banks to decide on sectors where lower rates will boost demand. I will meet bankers soon," he said.
According to statement, the additional capital infusion into the PSU banks would help in combating slowdown and boost output. The quantum of additional capital infusion, however, was not disclosed by the government.
"While this will bring relief to consumers, especially the middle class, it is also expected to give a boost to capacity addition, employment and production," it said.
As per the latest industrial output data, the output of the consumer durables sector declined by 9.3 per cent in July, compared to growth of 0.8 per cent in the same month last year. The segment saw a 12 percent decline in output in April-July compared with growth of 6.1 percent.
Consumer durables, a reflection of demand for manufactured products, include TV, fridge, washing machine.
The two-wheeler sales recorded a flat growth of 0.72 percent in April-August period current fiscal, as against a growth of 6.8 percent in the corresponding period last year.
The meeting, which lasted for over an hour, discussed credit growth in different sectors.
"At the end of September 2013, growth of gross bank credit stood at about 18 per cent Y-o-Y basis. However, credit growth is sluggish in some sectors leading to conclusion that demand in this sector remains subdued," the statement said.
The decision to enhance additional capital infusion comes ahead of the central bank's board meeting tomorrow in Raipur, which would be attended by Mayaram and Financial Services Secretary Rajiv Takru, among others.
The board meet assumes significance in the wake of economic growth falling to a four year low of 4.4 percent and current account deficit (CAD) at an elevated level of 4.9 percent in the April-June quarter.
While the government has been emphasising on measures for incentivising growth, the RBI in its policy review last month had hiked interest rates by 0.25 percent. The RBI is scheduled to announce its second quarter policy review on October 29.
Although Prime Minister Manmohan Singh and other government functionaries are expecting the growth to improve in the second half of this fiscal, Asian Development Bank in its recent report lowered India's growth projection for 2013-14 to 4.7 percent.
The economic growth rate slipped to a decade's low level of 5 percent in 2012-13.