PM sees further scope for interest rate reduction

There is further scope for banks in India to lower interest rates, following reductions in benchmark rates by the country's central bank, prime minister Manmohan Singh told industry leaders today.

The Reserve Bank has reduced its key interest rates several times over the past few months, but commercial banks are yet to fully translate it into lower loan rates for borrowers, he pointed out.

''While public sector banks have reduced the prime lending rates in the last three months between 150 and 200 basis points, other scheduled commercial banks are yet to respond in equal measure. With ample liquidity and low inflation, there is scope perhaps for a further moderation in interest rates,'' the prime minister said.

''Domestic credit flow for productive needs has to definitely be maintained at reasonable cost. With ample liquidity and low inflation, there is scope perhaps for a further moderation in interest rates,'' he said.

The growth of credit flow from public sector banks so far in the current fiscal (2008-09) has been 23 per cent against 21.9 per cent in the corresponding period of 2007-08.

On the other hand, he said, credit flow from private banks and foreign banks has, however, plummeted to one-third to one-fourth of what it was a year ago, he pointed out.

While India is better placed than most other countries in the financial sphere, the country has to tackle a regime of low inflation and demand uncertainties across sub-sectors of the real economy, to ensure that the financial sector remains healthy and supportive, he pointed out.

In order to sustain a high level of expenditure, the country would have to husband foreign exchange reserves responsibly, bearing in mind the need for fiscal discipline, and act continuously to improve general sentiment, he said.

''We need to be particularly sensitive to the impact of the slowdown on the weakest in the organised as well as the unorganised sectors. We must meet the challenge of job losses caused by the slowdown. These are challenges which can be understood and met only if all the stake-holders concerned continuously exchange ideas and support each other with confidence in the future, and concern for the well being of all,'' he said.

Addressing business leaders, including Tata Group chief Ratan Tata,  and ICICI Bank CEO KV Kamath as also planning commission deputy Monteksingh Ahluwalia and cabinet secretary KM Chandrasekhar, Manmohan said he has great faith and confidence in India's entrepreneurs and particularly in the wisdom and experience of captains of industry.

''The world today looks at India with respect and hope: respect for our calibrated reforms which have resulted in growth with justice, and hope that India would be an engine of global growth for the world economy. I am confident that we will all work together to fulfil these expectations, and secure the growth essential for our people,'' the prime minister said.

 He said there are signs of improvement in sectors like steel and cement. The auto sector, too, after a difficult patch, seems to be showing signs of recovery. Foodgrain production for 2008-09 is likely to be in excess of 228 million tonnes. The rural demand for goods and services appears quite robust and the outlook in the agricultural sector gives room for optimism.

At the same time, he said, the problems persists in certain sectors and sub-sectors, particularly where export dependence is high. We are monitoring these sectors, he added.

Singh assured business leaders that spending that has been pledged will take place. But, with elections around the corner, the government cannot announce any major spending plans now.

''We are aware that a big push to infrastructure would have a counter-cyclical influence and have taken steps to ensure that this happens in 2009-10 and beyond,'' he added.