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Hopes persist for India rate cut post-budget

BOMBAY: India's central bank chief kept the countdown to a cut in interest rates ticking with a series of statements this week, hardening expectations the move would come soon after the February 29 budget.

Reserve Bank of India (RBI) Governor Bimal Jalan told an economic conference in the southern city of Hyderabad more interest rate flexibility was needed for a vibrant financial system.

His comments came a day after he told another conference, in Bombay, that low inflation and an upturn in India's economic cycle warranted a cut.

As ever, Jalan cautioned that his room for manouevre is limited by the rigidities posed by the banking system. Indian banks' high non-performing assets and steep transaction costs put heavy pressure on spreads between lending and borrowing rates.

But everybody, from the central bank to the politicians to industry want lower rates.

The government in particular needs rates to come down to lessen its debt burden -- currently nearly half the government's revenues go for interest payments.

The government also needs rates to come down to smoothen the passage of the 2000/2001 (April/March) borrowing requirement.

The borrowing programme shot past the targeted gross 840 billion rupees ($19.26 billion) and could overshoot its target by 150-200 billion rupees.

Analysts said the central bank should cut rates to aid a sustained economic revival.

On Thursday, Jalan said he would review rates at an appropriate time.

Speaking at the Hyderabad conference on Friday, he said: "Prospects of growth in India has never been better than now."

Last week, India revised its estimate for gross domestic product (GDP) growth in 1998/99 (April-March) to 6.8 percent from an earlier forecast of six percent.

"There would be a case, given that inflation is low, the business cycle is on a growth path, that we have a reduction in interest rates," Jalan had said on Thursday.

India's wholesale prices grew 3.1 percent year-on-year in the week ended January 15, while the consumer prices index grew just 0.5 percent year-on-year in December.

WPI inflation has been low in the past eight months, but that largely reflects a spike last year.

RATE CUT TO WAIT TILL BUDGET

But central bank officials admitted the inherent rigidities in the system would delay a rate cut till budget.

Jalan on Thursday said deposit rates in the Indian banking system were not very flexible and two-thirds of the country's bank deposits were locked at high rates.

High rates on tax-free government savings schemes and mutual funds have kept the cost of deposits high for banks, which offer between 4.5 percent to over 11 percent on long-term deposits.

"In the rest of the world, deposit rates flatten for tenors beyond six months," he said.

"The RBI may cut the bank rate around the budget time, but will not be able to make it very deep," said S Venkitaramanan, ex-governor of the RBI.

"They are concerned about banks' profits and about the foreign exchange rate," he added.

The rupee is hovering around its all time low of 43.70 against the dollar and is guarded very closely by the RBI. -Reuters