• OUTLOOK ARENA
  • VIEWS ON NEWS
  • MARCH 15, 2000

Lower interest rates maybe around the corner

The Reserve Bank of India (RBI) is reported to be considering a 1% cut in the bank rate along with a reduction in the cash reserve ratio (CRR). The moves are aimed at improving credit availability and the attractiveness of government bonds.

Let’s tackle the first issue. During the year to January, non-food credit has grown by 10.4% as compared to 6.6% in the corresponding period last year. This clearly highlights the surge in demand for credit. However, during last year, inflation had been much higher (due to the hike in prices of essential commodities) as compared to current levels. Despite the marginal reduction in interest rates over the last one-year, there has been a sharp rise in the real rates on interest (as inflation has declined much more rapidly). Thus borrowers actually have to borrow funds at higher real rates of interest, implying higher costs.

In view of the nascent recovery in economic activity and the slow growth in investment activity the RBI needs to make credit available at reasonable cost. The proposed measure will take care of both these demands. Just to moderate the demand for more credit, it must be stated that inflation is on the rise (oil prices have jumped 200% over the last year or so) and any abrupt rise in money supply may directly add to it.

The second argument that such a measure would make the market for government securities more attractive however is not as convincing. The RBI is implying that the excess liquidity in the markets created by a cut in the CRR could flow into government bonds (what about the corporate?!!). Also, the reduction in rates meanwhile will make investment in government securities more attractive. With the government scheduled to borrow in excess of Rs 1.16 trillion, interest rates are unlikely stay low (or decline) for some time, making existing government yields unattractive…once again.

The RBI's measures are nevertheless desirable, as existing real interest rates are prohibitive for companies considering new investment opportunities. Moreover, with the government likely to jump in to the debt market early next month, the decision to increase liquidity will be more than welcome.

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 (Research Analyst) bearing Registration No. INH000000537 (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, Canada or the European Union countries, 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 (Research Analyst)
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