Rate cuts unlikely immediately, says Tarapore

MARCH 6: "Any reasoned analysis should indicate that it is just not possible to have any further significant and enduring reductions ...

MARCH 6: "Any reasoned analysis should indicate that it is just not possible to have any further significant and enduring reductions in interest rates in the foreseeable future," Tarapore told a financial seminar in Mumbai.

The government announced its budget for 2000/2001 (April-March) on February 29. Tarapore said given the government’s gross needs of Rs 1,170 billion ($26.85 billion) next year, 75 per cent of which is normally raised in the first half of the year, the RBI will need to raise around Rs 150 billion every month.

"Juxtapose this with the banking system’s annual deposit growth of say Rs 1,200 billion or an average of Rs 100 billion per month and it becomes clear that the authorities need to say goodbye to interest rate reductions," Tarapore said.

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If the economic growth picked up and credit demand grew, the RBI will have to work hard to prevent interest rate increases, he added. The RBI may have to reduce bank’s cash reserve ratio in phases to prevent interest rates rising, while simultaneously avoiding inflationary pressures, he said.

Tarapore said a second argument against a rate reduction was to prevent the bank rate, at which the RBI refinances banks, losing its relevance as a signalling device.

The bank rate, at eight per cent, was already at its lowest in 25 years and should ideally be between the deposit and lending rates. Highest deposit rates are around 10 per cent and the lowest prime lending rates are 12 per cent, Tarapore said.

A pre-requisite for interest rate reduction was a reduction in the fiscal deficit and it was erroneous to assume a rate cut will wipe out the fiscal deficit, he added.

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Tarapore said the annual budget estimates were realisticand likely to be achieved.

"There is a less possibility of budget 2000 being derailed as happened in 1999/2000," he said.