At 8 per cent, the bank rate, bankers argue, is among the lowest in the past 30 years and any further cut would hit bank bottomlines hard, with spreads coming under tremendous pressure.

The last time the bank rate was cut (along with a cut in the repo rate and CRR) was on March 1, when the RBI reduced it by 100 basis points to 8 per cent. Banks then had no choice but to take the signal and cut their own prime lending rates (PLRs) by 50-100 basis points. The State Bank of India (SBI) led the pack by cutting its PLR to 12 per cent. However, a similar cut in deposit rates was not effected merely because banks felt that they might face an exodus of deposits.

Competition for deposits is hotting up with mutual funds, given a shot in the arm by a favourable Union budget for fiscal 2000, luring traditional bank depositors away. Apart from mutual funds, central government schemes like the public provident fund and national savings certificates are attracting savings away from banks.

The post tax return on PPF is 12 per cent while the NSC yield is marginally lower than this. The RBI Relief Bond offers a return of 9 per cent and the average dividend on MFs (debt scheme) is around 11 per cent post tax.

Corporate India, reeling under a severe margin squeeze itself, has, however, been pushing hard for a rate cut. With the economy showing some nascent signs of revival, banks should lower their rates to aid a full-scale recovery, corporate chieftains argue.

But the moot point is: are interest rates in India really very high? Former RBI deputy governor SS Tarapore says the bank rate is among the lowest in the past 30 years. "Pleas for a large reduction in interest rates at the present time are misplaced and should be avoided by the RBI," feels Tarapore.

Industry bodies have been arguing that with the WPI-based inflation rate at such a low level, real interest rates in India are very high. But a comparison with the US, India's largest trading partner, shows that this is not necessarily true. The prime rate of banks in the US is currently at 8.25 per cent. Given an expected inflation rate of 2 per cent, the real interest rate is pegged at 6 per cent. In India, while the prime lending rate is at 12 per cent, the rate of inflation is expected to be around 5 to 6 per cent (by end-March 2000). This makes the real rate of interest around the same level as the US--around 6-7 per cent.

However, at this point of time, with inflation rate hovering around sub-two per cent, real interest rates do seem to be on the higher side.

Senior bankers feel that it will take a long time for India to move to an interest rate scenario like in Japan or in New Zealand (0-2 per cent). "The fiscal deficit has to be curbed and the government--which is the biggest spender--will have to curb its expenditure to usher in a low interest rate scenario," a central banker said.

Central bankers feel that the latest corporate results are signalling that economic revival is on the way and with WPI-based inflation at 1.95 per cent in the first week of October, it is only a matter of time before a full-scale recovery will take place. Industrial growth in the April-August period was up 6 per cent compared to the same period last year alongside a 6.7 per cent rise in the manufacturing sector.

The figures raise hopes that overall growth may be far better than the 3.8 per cent in 1998/99, but the recovery in growth rates after a three-year economic slowdown can hardly be called robust. Central bankers argue that with a demand-driven economic revival, the right time for a rate cut might be the last quarter of the financial year. It is another matter that corporate India may not feel satisfied with this argument.