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Interest Rates in India

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             .
             The low interest pass-through, has also been reflected in the hardening of the real interest rate. Real interest rate is the interest paid by the borrower after accounting for inflation. .
             Table 1 : Real Interest Rates.
             .
             (Per cent).
             .
             Category/Period 1990-91 to 1996-97 to.
             1995-96 2001-02.
             .
             1 2.
             .
             Depositors -0.3 1.9.
             Central Government 1.8 6.8.
             Borrowers 6.5 12.5.
             .
             Note : Real interest rates calculated as the weighted average lending rate of scheduled commercial banks less manufacturing inflation, for borrowers; weighted average interest rate on Central Government securities less WPI inflation, for the Central Government; and average cost of time deposits less CPI-IW inflation for depositors.
             .
             Source: "Report on Currency and Finance 2001-02- Reserve Bank of India Publications. Mar 31, 2003 (www.rbi.org.in).
             Table1 indicates that the real interest rates for borrowers have actually increased in the last decade. This is indicative of the widening spreads at banks. While banks have been quick to slash deposit rates as interest rates head south, they have not been as spontaneous in lowering the cost of credit. This means that borrowers are worse off now than they were a decade ago. Lending rates have not fallen at a similar rate compared to the fall in the inflation rate. For a country like India this is a cause of concern. .
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             .
             Source: "Real Interest Rates: Worrying Picture- www.equitymaster.com.
             What did India Inc. do? .
             It was widely hoped that the series of interest rate cuts over the past couple of years would prompt the corporate sector to borrow and invest in projects. This spur in investments was expected to trigger growth in the economy. But the question remains whether Indian corporates have taken advantage of the dropping interest rates to improve their profitability and spur growth? .
             An analysis of 200 companies constituting the BSE-200 index by the Business Line (Source: "Interest rate cuts, debt restructuring - The pay-off for companies- The Hindu Business Line Jan 19th, 2003) confirms that the manufacturing companies have taken advantage of the low interest rate regime.


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