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Interest rate hike jitters Fin Min

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Press Trust Of India

Last Updated: July 20, 2006, 17:19 IST

Interest rate hike jitters Fin Min

The Finance Ministry on Thursday said interest rates, now on an upswing, are not prohibitively high to kill growth.

New Delhi: The Finance Ministry on Thursday said interest rates, now on an upswing, are not prohibitively high to kill growth but felt moderate rates are crucial to spur economic activity.

"Not for a moment, is it my claim that interest rates are too low. On the other hand, if you say that interest rates have become prohibitively high, that is not quite true," Chief Economic Advisor Ashok Lahiri said.

As such, interest rates are not killing growth, he said but added that for spurring growth, the lower the interest rate, the better it is.

Lahiri said organised sector, particularly blue chip companies, do not have any problems in accessing the market and getting a good rate.

"The challenge really lies in how to extend credit to SMEs and agriculture--ample amount at reasonable rates. And there as you know in agriculture also this is happening," he said.

Though the interest rates on the benchmark ten-year government-securities have gone up by around 140 basis points in the last one year, one of the major successes of economic reforms has been the downward movement in interest rates, he said.

"In October 1996, the rate on the ten-year government paper was 13.7 per cent. It came down steadily to 5.1 per cent in October, 2003, and then it has been going up to stand at over 8 per cent now," Lahiri said.

Cash management by corporates is a very important factor, Lahiri said adding India Inc has already accumulated lots of cash in anticipation of rising interest rates.

Even if corporates need money in October, they may raise it in August. So, in September they are not taking any money, he said adding, "we are trying to see a process which by its very nature would be a step function."

The economy was witnessing a very rapid credit growth of 30-32 per cent. "If you start complaining if the growth rate decelerates to 20 per cent, you are already showing how ambitious you are and what your expectations from the economy are," he said

Lahiri's remarks came ahead of the quarterly review of the monetary policy by the Reserve Bank on July 25, which is widely expected by analysts to hike reverse repo and repo rates following hike in benchmark interest rates by the US Federal Reserve and Bank of Japan by 0.25 per cent each.

A review meeting by the Finance Minister with PSU bank chairmen tomorrow is also expected to take up the issue of interest rates in the economy.

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    The next data on inflation, to be released tomorrow, will also be crucial for the RBI to take any decision on hiking interest rates, analysts said.

    Inflation stood at 4.96 per cent during the week ended July 1. Besides, global petroleum prices are flaring up on tension in the Middle East.

    first published:July 20, 2006, 17:19 IST
    last updated:July 20, 2006, 17:19 IST