Ease the flow (Indian Express)

Mains Paper 3: Economy
Prelims level: MCLR
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Context

•  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.
•  It isn’t the only one. Even HDFC Bank’s three-year MCLR the rate below which a bank cannot lend and supposed to reflect its average cost of deposits or borrowings for the particular maturity has increased from 8.6 per cent to 9 per cent in the last one year.
•  ICICI Bank, likewise, has raised its MCLR for one year from 8.2 per cent to 8.8 per cent. But it’s not lending rates alone.
•  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.

Problems with 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, the last two years of the UPA government, consumer price inflation averaged 9.7 per cent, whereas benchmark prime lending rates ranged at 9.75-10.25 per cent.
•  Under the Narendra Modi government, average consumer inflation has come down to 3.6 per cent in 2017-18 and 2018-19 (till January 2019).
•  If despite that, even the sovereign’s borrowing cost is now about 7.4 per cent and banks have actually hiked lending rates, the reason for the current economic slowdown is clear.
•  High real interest rates for a prolonged period is why investments have slowed down and very few jobs are being created. The source of it has been the RBI’s tight monetary policy.
•  That made sense in the initial years of the Modi government, when a firm commitment to low inflation and macroeconomic stability helped restore investor confidence badly dented during the loose fiscal and monetary policies of the UPA years.
•  But the tightening has gone on for too long, which the Modi government and the RBI under a new, less orthodox governor have realised.

Conclusion

•  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.

Online Coaching for UPSC PRE Exam

General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) The Parliamentary term “Crossing the floor” refers to:
(a) Rush of opposition members towards the area occupied by the ruling party.
(b) A procedure through which a member expresses his disagreement with the decision of the Presiding officer of the house.
(c) Passing between the member addressing the House and the Chair which is considered breach of Parliamentary etiquette.
(d) A process to determine priority among more than one notice through a draw of lot.

Answer: C

Mains Questions:
Q.1) Briefly explain, what can be done to bring down interest rates to reasonable “real” levels? What can be done to bring down interest rates to reasonable “real” levels?