FM tells banks to cut rates

SBI's deposit rate hike sends 'confusing signals'.

Finance Minister P Chidambaram today advised public sector bank chairmen, who met him in New Delhi today for a first-half review, to lower both deposit and lending rates by 50 basis points and step up consumer lending to ensure the economy stays on track to grow at 9 per cent.

He, however, said he was conscious of the fact that any lending rate moves would be dependent on the Reserve Bank of India's (RBI's) monetary policy.

The finance minister also termed yesterday's move by the State Bank of India (SBI), the country's largest bank, to raise deposit rates 25 to 175 basis points as unwarranted because it sent "confusing signals" on interest rates, a bank chairman said.

SBI reduced deposit rates last month.

After the meeting Chidambaram told reporters, "I would like both deposit and lending rates to move down 50 basis points, so that it stimulates both investment and consumption."

"If monetary policy is also supportive, I think it is possible to look forward to a period of stable and perhaps some moderation in interest rates. But at least, we should aim for stable interest rates and hope to moderate them in the medium term," he said.

The finance minister also expressed concern about the slowdown in credit growth.

Credit growth has slowed to 22.2 per cent year-on-year as on December 21, 2007, from 29.7 per cent a year earlier.

Retail credit growth, the biggest driver of the credit boom in the last few years, has slowed to below 20 per cent from over 40 per cent in the previous few years.

Gross domestic product grew 8.9 per cent for the quarter ended September 2007 from 10.2 per cent in the same quarter of 2006-07.

The RBI is expected to continue with its monetary policy stance for at least a couple of more quarters and any reversal in interest rate policy is expected only in the second half of 2008.

"If lending rates are to be lowered, then a pre-requisite is that banks bring down deposit rates first. However, given the current liquidity conditions, the question is how many banks will show uniformity in approach," said the chairman of a large public sector bank.

SBI justified the move to raise deposit rates as a step to reduce its dependence on high-cost corporate deposits and consequently lower its cost of funds.