Government seeks greater rate cuts from bankers

In order to help the economy get out of the ongoing economic slowdown, the government is pressing banks for greater rate cuts. While rates across the board have come down over last one month or so, government feels that rates are not down enough to represent lower key rates offered by Reserve Bank of India and sharp decline in inflation.

After meeting with the public sector banks’ chiefs, external affairs minister who is also in charge of finance ministry currently said that the sectors which can generate employment quickly should be given support at the earliest. It is understood that bankers conveyed to government that they will cut rates further if the cost of funding and inflation remains low.

Economists feel that rates should be down by about 1-2% in the near term. Banks cost of funding mostly depend on borrowing rates, which are expected to some down as liquidity situation improves further in the economy and inflation goes down. Inflation or rate of increase in prices is in fact a major determinant of rate of interest.

The real return or rate of interest accrued to a lender is the difference between the nominal (quoted rate) and rate of inflation. Therefore, as inflation declines, depositors will be willing to keep funds with banks at lower rates, thus bringing deposit rates and hence cost of funding for banks down.