ASSOCHAM Seeks Indian Government’s Assistance For Interest Rate Reduction

ASSOCHAM (Associated Chambers of Commerce of India) a key industry body has urged both the Indian government and the Reserve Bank of India to push the banking industry to ease interest rates in the aftermath of demonetization.

The chamber made the request for interest rate cuts ahead of the central bank’s Monetary Policy Committee (MPC) meeting.

The MPC is set to meet on Feb. 7 and 8 and will determine the bi-monthly credit policy. In a statement Sunil Kanoria, ASSOCHAM president said,

As a majority owner of the banks and as a regulator, both the government and the RBI have roles in advising banks to pass on the commensurate reduction in the interest rates. This is all the more important in the wake of dismal credit growth, marked by subdued consumer demand and lack of investment appetite despite lowering of the lending rates

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The industry body is seeking a reduction of at least 50 -75 basis point in the benchmark lending rates given the windfall of cash received by the banks. The MPC cut the repo rate in October by 0.25 percent to 6.25 percent but retained it in December. ASSOCHAM pointed out that the cash from the public has been deposited in low cost current account/saving accounts (CASA) having interest rates ranging between 3-4 percent but the lending rates were still in double digits.

The recently-released Economic Survey has also raised the issue of rate cuts not being transmitted downwards by the banks. According to the survey, the base lending rate dropped marginally from 9.30-9.70 to 9.30-9.65 in 2016. Interest rates on term deposits with a more than one-year maturity period dropped from 7.00-7.50 to 6.50-7.00 in the same period.

Quoting findings from the survey, the chamber highlighted that the outstanding non-food credit (NFC) was growing at a rate lower than 10 per cent for all the months barring September 2016. Additionally, credit growth to the industrial sector was also very low, at below 1 percent in the current fiscal year, with a decline recorded in months of November, October and August.

Some industry analysts are predicting a rate cut of 0.25 percent by the central bank. According to brokerage firm Nomura, the RBI might slash rates to 6 percent in its next meeting but then hold firm for rest of the year to counter the possibility of inflation. However Nomura analysts said that global factors like higher oil prices and increased uncertainty could result in RBI deciding against it.

Charlie Harrison

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