Interest Rates in India: Present Perfect, Future Tense.
The Reserve Bank of India in its latest Monetary and Credit Policy cut the bank rate by 0.25 per cent to 6 per cent. The apex bank has also reduced the cash reserve ratio (CRR) by 0.25 per cent to 4.5 per cent beginning from the fortnight of June 14. The Reserve Bank of India's monetary policy stance thus continues to show "a preference for soft interest rates."" The rationale provided for such a policy action to bring down interest rates is that it will facilitate the revival of industrial growth, align domestic real interest rates with global interest rates and reduce the burden on the fiscal deficit via reducing the cost of the borrowing for the government. .
Interest rate cuts have become a common phenomenon in the monetary policy statements of the RBI of late. So why is the Reserve Bank almost regularly reducing the interest rates? One, there is high liquidity in the banking system because demand for credit has been sluggish for the last few years. Two, because investment in the industrial sector has been more or less stagnant and the Reserve Bank feels that by making cheaper money available, entrepreneurs will be encouraged to plan more new projects and build capital assets. The RBI has also urged commercial banks to align prime lending rates to the cost of mobilizing funds, and to reduce spread in PLR to promote investment in critical sectors like agriculture. The basic objective of the reduction in bank rate and CRR is to increase bank credit and private investment. .
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In the midst of this hype on interest rates, the common man stands a bit baffled. Have the reduction in the interest rates really acted as a catalytic agent for industrial growth? How do the variations in the interest rate structure impact the economy? What are the implications of the interest rate policies followed by various central banks and how do they affect industry and the business environment? And more specifically, has RBI been able to achieve its objectives? .
