P Chidambaram, Raghuram Rajan order banks to cut interest rates on loans

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Banks will get additional capital to provide loans at lower interest rates to stimulate demand. Banks will get additional capital to provide loans at lower interest rates to stimulate demand.
SummaryCut in banks interest rates on loans to impact not just middle class, but also India Inc, employment.

FM P Chidambaram and RBI Governor Raghuram Rajan have laid the foundation for a grand Diwali dhamaka that is likely to lead to banks cutting interest rates on loans for the festive season. Government today decided to enhance capital infusion into the PSU banks over and above what was provided in the Budget to enable them to extend more credit to auto and consumer durables sectors to stimulate demand and combat slowdown.

At a meeting between Finance Minister P Chidambaram, RBI Governor Raghuram Rajan and Economic Affairs Secretary Arvind Mayaram a decision was taken to increase the quantum of capital infusion into PSU banks.

Related: RBI bans zero per cent interest rate scheme for buying goods

"This amount (Rs 14,000 crore provided for capital infusion in Budget) will be enhanced sufficiently. The additional amount of capital will be provided to banks to enable them to lend to borrowers in selected sectors such as two-wheeler, consumer durables, etc at lower interest rates in order to stimulate demand," a finance ministry statement said.

It further said the additional fund infusion would help in combating slowdown and boost output.

Related: The story behind zero per cent interest EMI schemes

"While this will bring relief to consumers, especially the middle class, it is also expected to give a boost to capacity addition, employment and production," it added.

As per the latest industrial output data, the output of the consumer durables sector declined by 9.3 per cent in July, from a growth of 0.8 per cent in the same month last year. The segment saw a 12 per cent decline in output in April-July compared with growth of 6.1 per cent.

Consumer durables, a reflection of demand for manufactured products, include TV, fridge, washing machine.

The two-wheeler sales recorded a flat growth of 0.72 per cent in April-August period current fiscal, as against a growth of 6.8 per cent in the corresponding period last year.

The meeting, which lasted for over an hour, discussed credit growth in different sectors.

The quantum of additional capital infusion, however, was not disclosed by the government.

"At the end of September 2013, growth of gross bank credit stood at about 18 per cent Y-o-Y basis. However, credit growth is sluggish in some sectors leading to conclusion that demand in this sector remains subdued," the statement said.

"Based on the discussions, government has decided in principle to enhance the amount of

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