Critics of the Reserve Bank of India’s (RBI’s) stance to retain the status quo on policy rates will do well to read its governor’s speech at the Indian Merchants’ Chamber (June 20). He has provided an excellent and comprehensive analysis of the current economic situation and the rationale for the RBI policy. He has pointed out how interest accounts for only three per cent of the total cost of production. I would like to add that its proportion to profits is, however, substantial. Hence corporations clamour for a reduction in interest rates instead of taking steps through research and development to reduce the cost of production. The impact on the banking sector is different from that on corporations. A change in the rate of interest means a lot to the borrower and to the spread in the banking sector. Banks want to preserve the average margin of three per cent. It is high compared to their counterparts in the West. After the advent of e-banking and ATM, many bank branches see reduced footfalls. Most of the transactions are carried off by the branches. Should it not get reflected in service costs? It is not so now. Second, when RBI raises the interest rate, the objective is to reduce the pressure on aggregate demand for goods and services leading to inflation. The demand for credit is a derived demand.
A Seshan Mumbai
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