Mains Paper 3: Economic Development| Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
From UPSC perspective, the following things are important:
Prelims level: Basic knowledge of RBI’s open market operations.
Mains level: The news-card analyses the reasons for high interest rates its implications over the economy, in a brief manner.
RBI’s tight monetary policy has kept real interest rates high, impacting investment flow and job creation.
High Interest Rates
- Between January 2018 and January 2019, India’s consumer price inflation has fallen from 5.07 per cent to 2.05 per cent, year-on-year.
- Yet, the State Bank of India’s MCLR or marginal cost of funds-based lending rate for three years has gone up from 8.10 per cent to 8.75 per cent.
- ICICI Bank, likewise, has raised its MCLR for one year from 8.2 per cent to 8.8 per cent.
- Even yields on 10-year government of India bonds have fallen only marginally from 7.67 per cent to 7.37, despite inflation sliding so sharply.
Impact on Growth
- We have today are very high “real” rates of interest.
- If businesses are borrowings at not less than 9 per cent — micro, small and medium enterprises would obviously be paying much more — when inflation, whether based on the consumer or wholesale price index, is below 3 per cent, it is something serious.
- During 2012-13 and 2013-14, consumer price inflation averaged 9.7 per cent, whereas benchmark prime lending rates ranged at 9.75-10.25 per cent.
- Average consumer inflation has come down to 3.6 per cent in 2017-18 and 2018-19 (till January 2019).
- High real interest rates for a prolonged period is why investments have slowed down and very few jobs are being created.
Reasons for high interest rates
- The source of it has been the RBI’s tight monetary policy.
- A firm commitment to low inflation and macroeconomic stability helped restore investor confidence badly dented during the loose fiscal and monetary policies.
- But the tightening has gone on for too long.
- The RBI should cut its overnight lending or “repo” rate in the next policy review meeting in April.
- It can even go in for a 0.5 percentage point reduction, instead of the usual 25 basis points.
- The central bank could also consider more open market operations to bring down bond yields across all maturities.
- The government, too, should slash interest rates on the Employees Provident Fund, small savings and other administered schemes.