Over the last five years a regime of low interest rates has set in for the Indian economy. Despite the implementation of reforms, structural rigidities remained in interest rate structure distorting the true market-determined rates. Rates have been kept artificially high by offering high administered rates on small savings and provident fund. The gap between the short-term and long-term rates tended to remain high on account of this. The interest rates have been and continue to be very high relative to the rates prevailing in global markets.
Against the backdrop of slowing Indian economy, bank rate (which has become the anchor rate) and administered rates on small savings have been cut. Added to this the central bank proclaimed the policy of pursuing lower interest rate regime. With the US economy signaling lower interest rates it appears as if the global economy is bracing lower rate regime as well. Globalization will ensure that India will not remain immune to this global phenomenon. The woes of slowdown in Indian economy are partly attributable to the slowing global economy.
Obviously,
a major beneficiary of the cut will be the government itself,
being the biggest borrower of all. To the extent this results
in reduced debt-servicing burden, it bodes well for fiscal
deficit. Given the ongoing dormancy in primary markets, the
cut should induce corporates to float debt and make investments.
This, along with the cut in the bank rate, which has resulted
in lower PLRs, should signal reduction in cost of capital
and result in revival of capital investments. The seeds to
stimulate growth have been sown.Will
these expectations come true? Will the cut in rates help stimulate
growth in the economy? Will the lower interest rate trend
be sustainable? Will corporates finance their investments
enroute debt given the signals of low-cost regime?
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