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Cut in bank lending rates needed to spur credit demand

A monetary stimulus towards spurring credit pick-up is likely to necessitate a larger than 50 basis points reduction in bank lending rates, according to financial analysts.

Quoting the latest economic indicators, they said that the growth in non-food credit off-take over the three months has been quite poor.

Over the period stretching 13 weeks back from the first week of June this year, non-food credit has shown an increase of Rs 19.45 billion or an incremental growth of 0.4 per cent. This compares with Rs 125.10 billion seen in the last fiscal.

Analysts observed that the inflationary pressure on prices of manufactured goods was not expected since the outlook for demand was not likely to improve significantly in the near term.

The near-zero manufacturing inflation coupled with the poor demand outlook shapes the inflationary expectations that implies that the expected real interest rate faced by the manufacturers at the current nominal interest rate levels is quite high.

Sanjeet Singh from ICICI Securities said that in the emerging economic scenario, a larger than 50 basis points reduction in the lending rates might be necessary to revive the credit demand.

The recent statement of the Reserve Bank of India Governor which indicated a policy preference for further easing in interest rates in the face of the industrial downturn, has led to a renewed focus on the domestic macroeconomic picture.

Two critical data which give a direct snapshot of the extent of the downturn, related to industrial production index and non-oil imports.

While the growth in IPP stood at just 2.7 per cent on year-to-year basis in April, the non-oil imports posted a 10.8 per cent contraction. These along with low growth in non-food credit suggested significantly poor demand situation in the economy.

In the first eight weeks of the current fiscal year, the average money supply had grown at 17.7 per cent, far above the 14.5 per cent growth target set by the RBI in its Monetary and Credit Policy 2001-02.

Moreover the strong jump in reserve money since the last week of March 2001 would have resulted in further broad money growth over time.

Out of the Rs 170 billion of private placement taken so far by the RBI, only Rs 68.02 billion has been offloaded into the money market.

Given the fact that the money supply target of 14.5 per cent was set with an aim of providing adequate liquidity towards revival of investment demand, the ongoing rates of monetary expansion appeared excessive, said an analyst from a private research firm.

Thus, the signals from the central bank on the interest rates are fairly unambiguous, he added.

The RBI stance of domestic easing in conjunction with the current international monetary environment effectively limits the downside from prevailing price levels in the near term and there are no signs of early reversal of easy domestic policy unlike last year.

UNI

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