Sub-zero inflation to impel lowering of interest rates
By Vaibhav Aggarwal
Jun 22, 2009
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As the inflation turns negative for the first time in 30 years, Indian banks are gearing up for interest rate cut up to 100 basis points.

Considering the negative inflation, the real interest rates in the money market are high.

Commenting on the effect of this downscaling H Ratnakar Hegde, Executive Director, Oriental Bank of Commerce, said, "Inflation below zero level would definitely result in reduction in interest rates."

He added, "Inflation turning negative is very much on the expected lines because even the Reserve Bank Governor in the annual monetary policy had indicated"

Recently, HDFC Bank slash its deposit rates by up to 25 basis point with effect from 19 June 19, 2009. Paresh Sukthankar, Director, HDFC Bank Executive, reasoned, "This reduction is in line with the market trends and taking into account the developments happening in the market in the recent past."

It is reasoned that the low inflation is transitory and will not lead to any policy changes. Ashok Chawla, finance secretary, described the low inflation as unusual and confirmed that it would not prompt for any policy-changes or reforms. He reasoned that it is due to the base effect and will get corrected in near future. He also stated that this should benefit the manufacturers, as the cost of input comes has been lowering faster than the value-added output.

In a similar statement, Arun Kaul, executive director, Central Bank of India, said "this is temporary phenomenon and the decision on rates will not be based on one week's inflation data."

He explained, ‘interest rates are function of many factors and yield on advances is yet to come down. Globally prices of commodities have bottomed out. If it starts looking up then there could be reversal in the trend in the next few months.'

However, S K Goel, Chairman and Managing Director, UCO Bank, "Interest rates should come down. We will take a look on Friday as to how much deposit and lending rates further can be cut."

"My rough estimate is that 100 basis points at least, we will be able to reduce," he added.

Earlier, the State Bank of India reduced deposit rates across all maturities by 25 basis points. Following this, its largest subsidiary, State Bank of Bikaner and Jaipur, also severed deposit rates on various maturities by up to 100 basis points with effect from Thursday.


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