GOVERNMENT OF INDIA
Ministry of Finance
DEPARTMENT OF FINANCIAL SERVICES
UNSTARRED QUESTION NO 2368
TO BE ANSWERED ON 15.04.2008
Interest Rates in the Medium Term .
SHRI RAJEEV CHANDRASEKHAR
Will the Minister of FINANCE be pleased to state:-
(a) what is Government`s view regarding interest rates in the medium term and what are the implications of the US Federal rate cut on the Indian rupee; and
(b) what is Government`s information about the strategies of Central Banks of other countries in Asia and their response to US Federal cut in interest rates?
THE MINISTER OF STATE IN THE MINISTRY OF FINANCE
(SHRI PAWAN KUMAR BANSAL)
(a) Effective October 18, 1994, the Reserve Bank of India (RBI) has deregulated the interest rates on advances above Rs.2 lakh, including housing loans and these interest rates are determined by the banks themselves with the approval of their Boards. For credit limits up to Rs. 2 lakh, the Benchmark Prime Lending Rate (BPLR) has been prescribed as the ceiling lending rate. Banks have also been allowed to freely price their loan products below or above their BPLR and offer floating rate products by using market benchmarks in a transparent manner.
Effective October 22, 1997 the RBI has given freedom to the commercial banks to fix their own interest rates on domestic term deposits of various maturities with prior approval of their respective Boards. Interest rate on savings bank deposit continues to be administered by the RBI.
RBI has informed that since September 2007, there has been volatility in the foreign inflows to India reflecting the global financial market turmoil. Consequently, the exchange rate of the Indian rupee has exhibited two-way movements in the recent period. In the wake of the evolving financial market turbulence in US and Europe it is difficult to predict what will happen in the coming months.
(b) As per information gathered by RBI, in response to the US Federal cut in interest rate, several central banks that have been confronted with volatile and large capital flows have resorted to monetary tightening involving either hikes in policy rates or hikes in reserve requirements or both.
In China, the required reserve ratio was raised from 8 per cent in July 2006 to 15.5 per cent on March 25, 2008. After a gap of 17 years, the Bank of Korea raised reserve requirements from 5 per cent to 7 per cent for local currency deposits and short-term foreign currency deposits in November and December 2006, respectively. Meanwhile, in several Emerging Market Economies (EMEs) including China and Korea, central bank bonds have continued to absorb liquidity from the banking system. The Bank of Korea is investigating large volume trading of currency forward contracts by exporters and financial companies to limit gains in the won, which appreciated to a 10-year high in 2007. The People`s Bank of China raised the lending rate to 7.47 per cent in December 2007 from 7.29 per cent in September 2007.