The decision to keep the employees provident fund (EPF) rate unchanged at 9.50 per cent may prove a dampener for companies because this hinders banks from cutting lending rates. If small savings and EPF rates remain high, banks will find it tough to cut their deposit rates for fear of losing despositors; so their lending rates remain high.
EPFs are close substitutes to bank deposits. Most banks offer 8 per cent for three-year deposits, 1.5 percentage points lower than EPF interest rates. Between April and now, the prime lending rates (PLR) of major banks have fallen from 12 per cent-12.5 per cent to 11 per cent-11.5 per cent. But after the latest round of cuts in the bank rate and cash reserve ratio in October, no bank has cut PLR.
For companies, the nominal interest rate has not fallen as fast as the fall in the inflation rate. As a result, the real interest rate (nominal rate minus the inflation rate) has actually risen.
The year-on-year inflation rate, based on the wholesale price index, dropped from 5.3 per cent in April last year to 1.9 per cent in the first week of January 2002. The sharper fall in the inflation rate has pushed up the real interest rate from around 7 per cent to 9 per cent.
The corporate sector argues that a high interest rate is one deterrent to credit off-take. Non-food credit off-take was pegged at Rs 34,800 crore in the first nine months of the current financial year against Rs 49,986 crore during the comparable period of 2000-01.
Bankers, however, feel that credit off-take is not sensitive to interest rates but to industrial growth, which is why
