Tuesday, November 25, 2014


                                     LOWERING OF INTEREST RATES FOR LENDING.

                 The Finance Minister Mr.Arun Jaitley called for lowering of interest rates
                 to trigger growth.He says that the current interest rates are  disincentive. 
                 As inflation is stabilising he sees there is room for reduction of 
                 interest.But the Reserve Bank of India  does not seem to buy this 
                 argument.As Central bank they feel that the time is not still ripe for 
                 reduction and wish to wait for sometime till the inflation really 
                 stabilises .Both the arguments seem to be right.But can pure economics 
                 outweigh certain ground realities?.

                 If the Central bank reduces interest rates,the commercial banks will also
                 reduce their own interest rates.Lower interest rates make loans cheaper
                 which may lead to aggregate demand and spur economic growth.However,
                 it may even cause inflationery pressure which is worrying the RBI.What
                 worries the government is low credit offtake and the poor performance of
                 the manufacturing sector.Higher NPA's in the banking sector has lead to
                 "defensive banking" and the banks are shy of lending to manufacturing 
                 sector for the fear of adding more to the NPA's.This trend is not healthy 
                 in the long run.

                 One thing is sure,lower interest rates makes borrowing cheap which will
                 give a boost to the manufacturing sector and the demand for credit may
                 increase .This may even lead to higher economic growth and an increase
                 in real GDP.The government with people's mandate has certain duties
                 to perform like giving a boost to manufacturing sector which may lead to
                 increase in employment and also has to fulfil the Prime Minister's "Make
                 in India" for the world campaign.


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