Montek reiterates room for rate cuts

Written by Economy Bureau | New Delhi | Updated: Feb 21 2009, 05:42am hrs
Pranab-montek
RBI has sufficient room to cut the cash reserve ratio as well as key rates, Planning Commission deputy chairman Montek Singh Ahluwalia said on Friday. He also stressed that the next government must make use of the 1% of GDP additional Plan headroom indicated by finance minister Pranab Mukherjee in the interim Budget.

If included in the full Budget by the next government, this 1% should translate into additional spending of Rs 60,000 crore in 2009-10, Ahluwalia said. The interim Budget estimated total expenditure to rise by 5.8% to Rs 9,53,231 crore in 2009-10.

Inaugurating the Indian Labour Conference on Friday, Mukherjee said, We are encouraging investment in infrastructure, housing and the real estate sector, and larger utilisation of programmes like the National Rural Employment Guarantee Scheme and Bharat Nirman. If the work can be stepped up to a considerable extent, jobs will be created.

On Thursday, Mukherjee had hinted at action from the RBI in coming days to support the fiscal measures. Ahluwalia seconded that, stating, That is certainly an instrument (RBI) can use: both CRR and interest rates. The good thing is that they have a lot of scope. So, I think on the monetary side we have all the flexibility we need. CRR, which is the slice of

deposits banks must keep with RBI, is currently at 5%.

Ahluwalia said the global crisis had resulted in plunging export demand and domestic investment demand. If this is not replaced with new demand, production definitely goes down. The solution is for government to come in temporarily through monetary policy and fiscal policy. This government has done that, he said.

However, another top government official, who asked not to be quoted, said banks were unlikely to pare interest rates even if RBI reduced policy rates. One view is that bank rates will fall immediately if policy rates are cut. But this is not correct. The risk perception of banks is very high. Even though the reverse repo rate is at 4%, banks are still putting thousands of crores there while refusing to lend to corporates even at 15%, he said.

According to RBI's latest data, food and non-food credit contracted by Rs 4,175 crore and Rs 4,648 crore, respectively, in the fortnight ended January 30. To reduce banks risk perception the government is impressing upon them that the fiscal stimulus will work and that Plan spending would be raised next fiscal. The finance secretary is in constant touch with banks, the official stressed.

Things are better than two months agobanks are now willing to lend to good companies with a strong financial position. There are a lot of companies in the middle and now we need to get credit flowing to them, he said.

On the reluctance of foreign and private banks to lend to retail as well as corporate borrowers, the official said, Foreign banks are not lending as they have their own problems: they are broke back home. This is a wonderful opportunity for Indian banks to capture their business.

The credit of public sector banks grew at 28.6% year-on-year to January 2, compared with 21.4% in the corresponding period a year earlier, RBI data shows. The credit growth of foreign and private lenders almost halved in the same period.

While growth in incremental loans by foreign banks fell to just around 17% at Rs 25,016 crore from over 30% a year earlier, that of private lenders came down to Rs 52,375 crore, expanding by around 12% against more than 24% a year earlier, according to RBI data.