Are We looking at Lower Interest Rates?

With the Reserve Bank of India's (RBI) monetary policy review slated for October 30, I believe that it's the best time for the apex bank to lower the interest rates which are affecting investments and economic growth of the country.

I think the interest rates should be lowered from the current level. India has the highest lending rates and borrowings to Small and Medium Enterprises (SMEs) are very less and is also a laborious process. Lowering of the interest rates is a must if we are to sustain 9.0 percent economic growth.

RBI's main concern to rein in the inflation rate has been achieved with the rate of inflation declining to 3.23 percent at present. This comes after it had raised interest rates five times since mid-2006, most recently in March.

However what surprised me most was the tension brewing between the RBI and the Finance Ministry.

The RBI’s rationale for its policy has been that the economy has been growing at an unsustainable rate, which carries the risk of rising inflation.

But recently Mr P Chidambaram has asked banks to ignore these signals and not raise their lending rates in order to avoid disrupting the growth momentum.

I think he is right in his observation that banks need to find ways of lowering their cost of funds so that lending rates can be kept down.

The fact of the matter is that – is it right for both the Finance Ministry and the RBI to send conflicting signals to the banks? I think they should make a concerted effort to resolve the issue. All I believe is that India's robust growth has to be sustained; we can by no means check economic growth fearing rise in the inflation rate.

We need to understand that although the decline in bank credit has helped the RBI manage liquidity, it has also impacted the industrial output adversely.

The hardening of interest rates over the last one and half years was squeezing the profit margins of all enterprises. Add to that the appreciating rupee. I fear that (SMEs) will have to close shop if no relief is provided.

I strongly believe that reducing interest rates would go a long way in reducing the operating costs of exporting SMEs that have been of late facing a decline in profit margins.

Today inflation rate is far below the lower limit of RBI's tolerance levels of 4-4.5 percent. I think RBI should take this point into account when they review the monetary policy at the end of this month.