rediff.com Business News: RBI offers little hope of interest rate cuts

Indian central bank governor Bimal Jalan said on Thursday that there was no "quick fix" solution to reduce interest rates and issued a stern warning on the dangers of the nation's rising fiscal deficit.

Unveiling the Reserve Bank of India's macroeconomic review of the financial year ending March 31 and its credit policy for fiscal 2000-2001, Jalan acknowledged that interest rate reductions in the past year had not kept pace with the decline in inflation rates.

"While much greater flexibility in the structure of interest rates in tune with changes in the inflationary environment is desirable, there is no quick fix solution to engineer a sharp fall in nominal deposit and lending rates of banks," Jalan said.

Prime lending rates charged by India's top state-run banks range between 11 per cent and 12 per cent.

Insisting that decisions to cut rates lay "entirely within the purview" of the individual banks rather than the RBI, Jalan said that any further decline in lending rates would require "vigorous action" by banks to reduce transaction costs, improve risk management and weed out non-performing assets.

Jalan said "concerted action" was also required to move forward with financial reforms in a competitive environment, coupled with a reduction in the government's fiscal deficit.

India's fiscal deficit was estimated at 5.6 per cent of gross domestic product for the fiscal year just finished, well above the budgeted target.

"While some comfort can be drawn from the fact that we have been able to manage a large government borrowing programme without undue strain on interest rates or the overall liquidity environment, it is also clear that such high levels of fiscal deficits are not sustainable over the medium term," Jalan said.

"The continuing large fiscal deficits year after year have already led to sharp increases in repayment obligations on outstanding public debt in the nineties."

Jalan said it was of "utmost importance" to develop a national consensus on an "effective and time bound programme" to reduce the deficit.

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