With inflation at record low, slash in interest rates should follow

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Bikky Khosla | 24 Mar, 2009
With the inflation rate dipping to a historic low of 0.44 percent last week from a 15-year high of about 13 percent till September 2008, the economy stands to face the side-effects of deflation. Already consumer sentiments have dropped drastically due to the global slowdown and with banks still wary of lending, the economy may go into deep-freeze if corrective measures are not taken now.

The worst part is that despite the banking and financial system having enough liquidity, they are not releasing it for fear of defaults. Banks now have to come forward and lend to keep the growth momentum ticking. Although the Reserve Bank of India (RBI) has been loosening up the monetary policy, I feel it's not enough by any means. What India Inc. needs is more aggressive easing of the monetary policy.

It is my feeling that to inject this much-needed confidence in banks, RBI will now have to play an active role. It needs to take advantage of the 0.44 percent inflation rate and curtail prime lending rates and thus remove sluggishness in demand. There is scope for economic expansion even at times of meltdown if the apex bank takes these steps. It's now up to the RBI to see that it takes measures that will not only ensure economic expansion, but will also help the economy to bounce back.

Even industry stalwarts are of the opinion that: '...given the present inflation rate and the interest rates being charged by banks, the real rate of interest in the economy continues to be at double digits. The banks must lower the lending rates to single digit levels if economic activity is to be stimulated.'

Moreover, even to create consumer demand, interest rates must come down and should be made affordable for homes, cars and other consumer durable products. Owing to the current high interest rates, buyers are avoiding purchases in the hope that interest rates would moderate soon. This is creating a negative impact on demand for products, which in turn, is affecting production.

To spur up demand there has to be a further slash in interest rates, no doubt about that. Doing so will ensure that the recessionary trends in demand and consumption pattern will slowly and gradually phase out.

The question is, when are we going to see these measures come into force? Let's keep our fingers crossed till the good news comes along!