X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Why arenít interest rates declining? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jul 14, 2000

    Why arenít interest rates declining?

    According to the Reserve Bank of India (RBI) publications, interest rates over the last one-year have declined only marginally. This is despite incessant efforts to affect a significant decline in rates. What is causing this Ďstickinessí in interest rates?

    Well, a large part of this has got to do with the government and its prodigal ways. Consider the following statistics:

    • The central government's fiscal deficit increased from a low of 4% of GDP in FY97 to 5.6% in FY00. The deficit is projected at 5.1% of GDP in FY01. (These figures exclude the deficit of the state governments and other off balance sheet items like the oil pool account and losses of public sector units.) This has forced the government to raise resources from various sources like banks, individuals and market borrowings among others.

    • The central government, which financed only 35.7% of its deficit by borrowings from the market in FY97, now finances over 70% from this source. The point is driven home when one sees that between FY97 and FY01BE, the fiscal deficit has increased by 95% in absolute terms.

    Fact sheet on the Central Government's financial position

    Both these factors have ensured that the demand for funds in the market continues to remain high. The government has become the largest borrower in the market, who is perpetually waiting to pounce on liquidity, the moment it is spotted. This continuously exerts an upward pressure on interest rates, negating the other efforts to bring down rates.

    Letís take the example of banks, which are the primary providers of credit. The RBI imposes an SLR (statutory liquidity ratio) requirement on banks. The aim of the SLR is to ensure that banks have adequate liquidity at all points of time. However they serve another purpose Ė that of financing the deficit. This is so because of the very few investments that qualify under the SLR requirements, government securities are one of them. The returns offered on these securities are not completely reflective of market rates (till a decade back it was fixed at 4.6% per annum!) resulting in sub optimal results for the banks. The high rates of CRR (cash reserve ratio, which is maintained with the RBI) and SLR basically result in an increase in cost of that portion of the funds, which are to be lent out. Banks thus try to make up by charging higher rates from borrowers.

    The most important step towards a lower interest rate regime would be a decline in the deficit of the public sector as a whole (currently estimated at over 10% of GDP). Such a development would reduce demand for funds by the government, in effect freeing up resources in the market.

    A lower fiscal deficit would serve other purposes too. As the government would limit itís spending in relation to its revenues, the pressure on prices (inflation) would reduce. These factors would also effect favorably the exchange rate environment.

    Sadly, such a development, although planned for many years, has failed to materialize.

     

     

    Equitymaster requests your view! Post a comment on "Why arenít interest rates declining? ". Click here!

      
     

    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    MARKET STATS