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Flurry of rate cuts evokes mixed reactions

Mohammed Ash'ar Khan in New Delhi

The interest rate cuts by the Reserve Bank of India, development financial institutions like IDBI, ICICI and IFCI, and a few public sector commercials banks like Bank of Baroda, are expected to bolster liquidity and spur credit offtake.

The imminent infusion of about Rs 35 billion into the economy is expected to trigger credit growth and spur corporate investments in new projects.

However, a few financial experts reckoned the fiscal situation may eventually force the banks to backtrack.

K P Singh, president of the Associated Chambers of Commerce and Industry, said, "Once the market opens up, particularly when you want to be competitive vis-à-vis world prices, the interest factor becomes very important. In that context, India today is called a very high cost economy."

Economy watchers said the RBI ought to have effected these cuts in October 1998 itself, when it announced the credit and monetary policy for the second half of fiscal 1998-99 with low credit demand as the backdrop. However, it chose to act when the credit policy for the first half of 1999-2000 is due in April, they said.

RBI governor Bimal Jalan's statement that slowdown in credit offtake, low inflation and lower government borrowings have prompted him to effect cuts has not cut much ice among observers.

Academic Pradeep Srivastava said, "In the present environment, it is difficult to see interest and the borrowing programme of the government for 1999-2000 as very closely connected. We don't know how valid the assumptions about the borrowing programme in the Budget are. And in all likelihood, the actual borrowing programme will be much larger than what was projected in the Budget. So that should not be the reason for decreasing the interest rates in the economy."

Agreed Professor D K Srivastava, economist: "The borrowing programme is quite large still. The fundamentals have not changed in that sense. But I think the objective was to generate demand in the economy through the export sector and through the private sector, because the government's own demand is not going to be augmented significantly through the Budget, because capital spending in the Budget is still very limited."

Industry analysts said lower cost borrowing is necessary to make new projects viable. It will make the industry more competitive globally. Interest rate cuts will make debt less attractive for the investor and lead to a shift to the equity market. Corporates felt a one per cent cut is only the first step in this direction.

K P Singh of Assocham said, "I believe one per cent by itself will not kickstart the economy. But certainly it will help the industry. It will make the cost more competitive."

Whether a cut in the interest rate will lead to a depreciation of the rupee remains to be seen. Pradeep Srivastava said, "By easing the domestic money market conditions, the RBI is not saying, 'Go out and speculate and bring the rupee down.' If the RBI wants the rupee to be depreciated, then it has got simpler mechanisms available. A speech by the governor or the finance minister hinting at it will be more than enough."

The experts said the biggest beneficiary of rate cuts would be the government itself, since it is the biggest borrower. "Government preempts the market for funds. It completes its borrowing programme as soon as possible and then leaves the market open for other players. Although it continues to borrow throughout the year, a large part of its borrowing is done in the early phase, which pushes up rates. So the government would benefit out of this rate reduction."

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