Interest rates may soften by 0.25-0.5% in Q3: FM

The Indian economy may soon see interest rates easing by quarter to half a percent, with bankers hinting at a cut in lending and deposit rates following a request by Finance Minister P Chidambaram.

The cut in lending rate could, however, be restricted to loans for consumer goods as the Finance Minister favored moderating credit to the housing sector as per Reserve Bank`s directions.

`With inflation at its 5-year low, falling interest rates globally, and surplus liquidity with the banks, the interest rates can come down by 0.25-0.50% in third quarter,` Indian Banks Association Chairman M B N Rao told reporters at New Delhi on Friday.

Chidambaram insisted that PSU banks should cut deposit and lending rates by half a percent to spur investment and consumption so that the economy can be sustained on a high growth path. `I would like, I can`t wish this, that banks cut lending and deposit rates by 50 basis points so that it stimulates investment and consumption, ` he said.

He also wanted banks to enhance lending for consumer goods, while credit to housing sector could continue to be moderated as per the RBI`s directions. The Finance Minister said cut in interest rates have to be decided by each bank, taking into consideration its assets and liabilities.

Rao, who heads Canara Bank, said that his bank would take a decision in this regard after a meeting of the Asset- Liability Committee shortly. Some banks said they may wait for RBI`s quarterly review of monetary policy, slated for January 29 before taking any decision on interest rates.

Chidambaram foresaw stable interest rates and `possibly` moderate interest rates in the medium term, if the RBI`s Monetary Policy is supportive. At least, we should aim for stable interest rates and hope to moderate them in the medium term,` he said.

Prime lending rates, which are the benchmark for lending rates, are currently hovering between 12.75 and 13.25% as against 11 and 11.5% a year ago. Fixed Deposit rates on an average are hovering at 8-9% as against 6.75-8% last year.

Earlier, SBI CMD O P Bhatt said interest rates looked stable for the time being, at least till April. Punjab National Bank`s CMD K C Chakrabarty also said interest rate cut may not happen immediately. It could happen only after RBI`s credit policy for next fiscal.

The Finance Minister expressed satisfaction with credit growth of 22.2% and deposits at 23.9% as on December 7.

He said banks should not indulge in competitive bidding to raise bulk deposits in the last quarter. `They must keep cost of money low so that cost of lending can be kept low.`

Referring to banks` non-performing assets, Chidambaram said the gross NPAs have marginally declined to 2.6% in the first 6 months from 2.66% last fiscal.

He said banks are also on the target to provide 15% of their total advances to the minorities in the next 3 years, as most of them have already achieved 11-12% lending to these sections.

On the restructuring of regional rural banks, Chidambaram said eight states have agreed to provide funds for this purpose, and by March 31 this year RRBs would add another 500-600 branches in rural areas.