Faulty transmission

20 March 2013 By Andy Mukherjee

A quarter-point rate cut, designed to spur lending, has little chance of reaching borrowers. Banks need all the income they can get to attract depositors and lay aside provisions for bad debt. Only when inflation is tamed, and banks recapitalised, can credit flow efficiently.

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The Reserve Bank of India cut its target for overnight interbank rates by a quarter percentage point to 7.5 percent on May 19. Following the latest cut, interest rates have fallen one percentage point in the past year in an economy growing at its slowest pace in almost four years.
Deposits at Indian banks have grown less than 14 percent in the past year, according to the central bank’s data, compared with a 17 percent increase in bank credit. The credit-to-deposit ratio is 78 percent, the highest since at least 2001.

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