Real Interest rate increases with inflation dipping down
By Joseph Samson
Mar 23, 2009
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As India's inflation dipping down to 0.44% for the week ended March 7th may have raised the concerns for severe slowdown in the coming times but there are also going to be increased real returns.

With inflation rate falling, the real interest rate in the economy has increased to around 12% against 4.5% a year ago. The real interest rate is the difference between the prevailing benchmark prime lending rate (BPLR) and inflation rate.

The International Monetary Fund said that India's real interest rate has increased in the past few months with dropping inflation and therefore there is more room for the rate cut.

Presently the BPLR for most banks stand in the range of 12.25-16.75% and with inflation close to zero level, investors can earn around 7.5% on a one year deposit as compared to the negative returns when inflation was hovering to around 13% in August.

Ever since the global financial crisis became intense, RBI has been using its monetary tools and slashing the policy rates to boost liquidity and prompting a lower interest regime in the country.

The RBI measures have injected more than Rs 3,88,000 crore into the system and yet the foreign and private banks have been hesitant in lowering their interest rates.

Further the economists are anticipating RBI to resort to further cut the interest rates at the backdrop of moderating growth. "Supported by the coming deflationary patch in the WPI as well as continued weakness in incremental data, we expect to see further monetary easing of 100 basis points in the coming months," said Rohini Malkani, economist at Citi India.

However PSU banks that have been declining interest rates with the RBI cut said that any further cut in their rates would depend on the additional adjustment in the cost of funds. These banks have been burdened with high costs deposits, which they are now refusing to accept. Until now PSU banks have reduced their lending rates by up to 200 basis points.

Commenting on the RBI future move, Central Bank of India Executive Director Pradeep Ramnath said, "Inflation at close to zero is a matter of concern in the sense that consumption is less and possibility of further rate cuts cannot be ruled out."


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