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Saturday, September 5, 2009
Reserve Bank of India Governor Dr D. Subbarao released the document 'Macroeconomic and Monetary Developments: First Quarter Review 2009·10' recently. Mehul Dani reports on his speech and the subsequent interactive session. Excerpts:
RBI Governor D Subbaro has said that there is a scope for banks to lower lending rates further. "Banks say that the demand for credit is picking up on the back of investment in projects. The bankers informed me that the demand for credit in certain segments like home and retail is picking up, which was a welcome sign. There is a scope for reducing lending rates within the policy rate adjustments already done by RBI. Interest rates for short-term credit should be about 9.5% but these are about 1O.5'YtJ. So, there is scope. As deposits contracted at higher rates mature and get re-priced, the cost of money to banks will come down and they can look to reduce lending rates," Subbarao said after presenting the first quarter review of the monetary policy on 28 July 2009.
The RBI prodded banks to lower lending rates, saying the full pass-through of the monetary policy rate changes had not taken place. Besides, it said banks could pass on the benefits of the lower cost of funds due to the reduction in deposit rates initiated over the past several months.
On being asked about the steep yield curve that may result in a liquidity trap, Subbarao said: "We do have tried to influence the yield curve. After a review, we changed the maturity profile of the government borrowing in order to manage the yields towards small loans and others."
To a question as to whether the worst is over, he said: "I wish I could definitively say that. Our financial sector only had hiccups and didn't have deep structural problems. But the challenge going forward is to increase flow of credit. We talked to bankers and they said the demand for credit had come down. We talk to the corporate sector and they say the supply has dried up, so there is a mismatch there."
The RBI prodded banks to lower lending rates, saying the full pass-through of the monetary policy rate changes had not taken place. Besides, it said banks could pass on the benefits of the lower cost of funds due to the reduction in deposit rates initiated over the past several months.
On being asked about the steep yield curve that may result in a liquidity trap, Subbarao said: "We do have tried to influence the yield curve. After a review, we changed the maturity profile of the government borrowing in order to manage the yields towards small loans and others."
To a question as to whether the worst is over, he said: "I wish I could definitively say that. Our financial sector only had hiccups and didn't have deep structural problems. But the challenge going forward is to increase flow of credit. We talked to bankers and they said the demand for credit had come down. We talk to the corporate sector and they say the supply has dried up, so there is a mismatch there."
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