An Insight into Lending Rate Changes
By Vaibhav Aggarwal
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Bankers also argue that further deregulation of Indian economy, would give wider exposure to Indian economy and increase sensitivity towards global economic volatility.

The wholesale price-based inflation index will rise in near future with deregulation of the domestic oil prices.

It is also expected that global economy will recover in near future. The GDP of the country grew at 5.8 percent against the expected 5 percent for first quarter of 2009, hinting at the domestic-demand led recovery. Bankers hold that as the economy revives, liquidity would tighten and cost of deposit will increase. These factors reinforce the view that rate cutes have more or less reached their upper limit in view of current economic trends.

Leading Rate Lowering: Is it realistic?

Monetary and interest rate policy is critical for regulation of financial system. The effectiveness of the monetary policy framed by the central bank depends on the speed and extend to which these are accepted in the market.

In the present economic scenario, these policy rate changes have been fast accepted in money market and for government securities. However, this change is yet to be imbibed in the bank lending rates. As stated earlier, against RBI rate cut of 400 basis points by RBI, during the second half of 2008-09, banks lowered the lending rates only between 50-150 basis points.

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