RBI: Providing a rate cushion

The interest rate cycle is beginning to turn, taking the economy slowly away from the low rate regime that has contributed so much to the current consumption-led economic boom. Not surprisingly, there are fears that the retail segment, the biggest beneficiary of soft rates, may well be the worst loser.

Interest rates are rising because deposit rates are rising. And that's because of stiff competition amongst banks for, ironically, low cost deposits. The lacklustre growth in bank deposits is quite evident from the figures put out by the Reserve Bank of India (RBI): in January 2006 alone, deposits grew 17 per cent year-on-year; the comparative credit growth was 32 per cent.

In fact, deposit rates have moved up from 5.25-6.5 per cent in April 2005 to 5.5-7 per cent now. Lending rates for housing, car and personal loans have moved up marginally from 7.5 per cent, 8.75 per cent and 12-13 per cent, respectively, to 8 per cent, 9.50 per cent and 13-14 per cent during this period.

However, the tax relief on fixed deposits announced in the 2006-07 Budget has put some sheen back on this instrument and is expected to ease the competition among banks to mobilise deposits at increasingly higher rates. Among other reasons, stiffer provisioning norms mandated by the impending implementation of Basel II norms (from December 2006) are also putting pressure on the liquidity of banks and exerting upward pressure on lending rates.

The next monetary policy, due out in April, will provide a more precise pointer to the direction of interest rates. Experts, however, feel the robust growth of the economy will discourage RBI from hiking interest rates aggressively. In the past, too, it had adopted a hands-off policy, even when the inflation rate soared to over 6 per cent on the back of rising global crude oil prices. So, history suggests a hands-off approach yet again. And finally, analysts say rising income levels can absorb the shock of at least another one per cent hike in lending rates over a period of one year. Things will get sticky only when housing, car and personal loan rates cross 10 per cent, 12 per cent and 18 per cent, respectively. Till then, there is little fear of high interest rates puncturing the boom.

-Anand Adhikari

Creating Boom II
The proposed Rail Freight Corridor will result in huge business and job opportunities across the country.

Lalu Prasad Yadav as an icon of economic liberalisation? No; it isn't a bizarre joke. The Railway Minister, who is hardly anyone's idea of an economic messiah, may still end up as one of the faces of the great Indian growth story. But we're getting ahead of ourselves. Let's start at the beginning: the Golden Quadrilateral and the North-South and East West corridors kicked off the current economic boom. And the hectic real estate activity across the country is playing a large role in sustaining it. How? The construction industry has linkages with more than 200 others; so, its good fortune rubs off on them. The Railway Ministry's decision to set up a dedicated Rail Freight Corridor promises an encore of this story.

The proposed corridor, which will cost an estimated Rs 22,000 crore, will result in a two-fold gain for the economy. The direct financial impact of such a massive and pan-Indian investment will immediately result in huge job opportunities and profits across hundreds of sectors. "And smoother movement of freight can lead to a 30 per cent lowering of transaction costs," said Kapil Anand, CEO of Gateway Distriparks, one of the applicants for the container business that has recently been thrown open to the private sector. Implications: cheaper goods for India Inc., higher sales and more exports. "It will lead to tremendous efficiency gains," agrees Urjit Patel, Executive Director, Infrastructure Development Finance Co, "but much will depend on issues like whether land has to be acquired afresh for the project or whether it can be built on land already owned by the Railways." Adds Suneet Maheshwari, Executive Director, SREI Infrastructure Finance: "A shortage of wheel-sets for wagons, however, may cause bottlenecks." At present, wheel-sets are manufactured only by the Railways. A senior Railway Board official shrugs off these concerns. "Plans to double capacity to one lakh wheels a year have already been announced. And if the shortage persists, the import option is always present," he says.

"It will take another year to complete the planning, and tie up the funding. So we should be able to start execution by April 2007," he adds. The scheduled year of completion: 2012. When that happens, Lalu Prasad Yadav will have shed his rustic image for good. And who knows, he might even be the toast of Davos.

-Shalini S. Dagar

"India Needs To Be Present At The Top Table At IMF"

Bank of England governor Mervyn King was in India recently to meet government officials, bankers and industry leaders. He met Business Today's Ashish Gupta and Shalini S. Dagar for a freewheeling chat on the international financial system and India's place within it. Excerpts:

What role can India play in shaping the new financial order that is being created for the world by the big boys of global finance?

India and China need to be present at the top table at International Monetary Fund, which is no longer an exclusive club of rich countries. Low- and middle-income countries now affect the global economy. And membership of the top table must reflect this.

There was an expectation that the euro would emerge as an alternative to the dollar. Please comment.

It is a mistake to look at any one currency as a benchmark for the world. The whole point of having free capital markets is that you have several currencies co-existing at the same time. The need for a single reserve currency is much less than what it was earlier. One of the most encouraging developments over the last few years has been the ability of a number of emerging market countries to issue public debt denominated in their own currencies. So, we are settling into a world of many currencies.

The revaluation of the Chinese yuan has been a hotly debated topic. How do you look at the current interaction?

The discussion between China and other countries should not be focussed exclusively on the exchange rate. Instead, we should look at a whole range of fiscal policies. And, we must find a proper framework in which not just China, but India, too, should be at the table. Those private breakfast meetings on the fringes of g-7 (Group of Seven) meetings are not enough.

So, are you recommending a revaluation of the Indian currency as well?

No. I am not making any suggestions. All I am saying is that we need to talk about it.

With oil prices so volatile, what is the outlook on interest rates?

The honest answer to this is: I don't know. What we do know are the issues that will determine the interest rates. In our case, it is inflation. The worst thing that you can do in economic policy is to pretend that you know. The secret of success is to be ruthlessly honest to yourself and other people about what you don't know.