Interest rates have followed the demand and supply positions in the non-food credit market in the nineties as opposed to lagging the inflation rate in the late eighties, according to the Reserve Bank of India's (RBI) currency and finance report.
Although lending rates have fallen substantially in recent years, they tend to be sticky downwards, the report observed. Non-food credit is significantly impacted by interest rates as they directly affect the cost of credit. Therefore, interest rates have successfully emerged as a major monetary policy instrument in recent times, the RBI report.
The importance of interest rates for credit allocation also depends on whether price mechanism is the dominant channel for clearing the credit market. The apex bank has been emphasising on the volume of credit flow and interest rate conditions in its monetary policy, says the report.
Growth in non-food credit extended by scheduled commercial banks has declined from 18 per cent during the eighties to 15 per cent during the nineties. This slide reflects the switch in portfolio of banks towards relatively risk-free assets like government securities in the wake of the introduction of stringent prudential and asset classification norms. Also, availability of alternative instruments for raising resources by corporates has led to this change.
In contrast to the trend in non-food credit, investments in government securities accelerated from 19.4 per cent during the eighties to 20.4 per cent during the nineties. The rate of increase was even sharper on a monthly average basis, from 18.7 per cent to 20.5 per cent per annum.
Ratio of non-food credit to deposits declined by 7.3 per cent during the nineties to 51.3 per cent whereas investments in government securities as a proportion of deposits rose 5.1 per cent to 30.4 per cent. year'
