Will China’s Interest Rate Cut Impact India?

Business Economics & Services Team (BEST)

                                          Will China’s Interest Rate Cut Impact India?

The good news is that the People’s Bank of China has decided to cut its bench mark one year lending rate by 40 basis point (0.4%) to 5.6% from 6 % and the one year deposit rate by 25 basis point (0.25%)to 2.75 % effective from today. This has come close on the heels of its decision to inject US$ 81 billion into the banking system to support credit growth.

Everyone is asking will this cut influence RBI decision on interest rate. Expectation of a turnaround of the Indian economy is widely expected. With the fall in the rate of growth of whole sale and retail inflation, the corporates are expecting a rate cut around first week of December 2014, when the RBI will review the monetary ecosystem. Apart from the fall in the rate of inflation, the protagonists of interest rate cut say that the economy is expected to clock a growth rate closer to 6 %, which will be an all-time high in the recent years. Coupled with the softening of oil prices and a consistent recovery of the US economy, policy watchers  predict that the RBI cannot delay the interest rate cut for long. Significantly, none other than the Finance Minister of the country has put his weight behind the increasing number of corporates, business associations and others for a rate cut. It is also important to note the cautious reaction coming out from the RBI sources that mere demand for a cut in interest rate alone will not hold good: there should be a conductive eco system that supports the rate cut.

In the meantime, the corporates have upped their demand for a sizeable rate cut. Any reduction in interest rate less than one percent, according to them, will not help in stimulating the economy. The reasons are that the cost of capital is very high as compared to that is available domestically for competing countries. This has led to a complete jolt on Greenfield projects. Even implementation of some of the projects already underway, is struck at various stages on account of higher cost of credit. This trend has to be reversed: earlier the better.

Another cause  of worry is the increasing non-performing assets (NPAs) with the public sector banks.  According to reports, NPAs of at least five PSU banks have gone worse and they have been embarking on a massive restructure to hide the increasing ratio. In certain cases, the NPAs are as high as one-fifth of their loan book. The restructuring measures include conversion of debt into equity, extending the repayment cycle of loan etc. Along with restructured loans, which  are not counted along with NPAs, in some banks the non-performing assets is high as 20.5%. On an average, across the PSU banks, this works out to over 12%, which is definitely a worrisome indicator.

The worst of all these developments, as reported in media, is the rising share of NPAs in home loans, which always bucked the trend and had a mellowing effect, unlike the corporate lending. The data in the public domain reveals that the NPAs in the housing loan segment have grown up to 1.5% in September, this year   from 1.4% estimated in March. On the top of it, for three PSU banks, the NPAs in the house loan sector is  5% of advances. Not many years ago, the trigger for the world economy to enter a recessionary phase was the sub-prime lending crisis in the US, which had a snowball effect. Against the backdrop of  standstill in the realty sector for quite some time ( there are reports  that realty  sector prices  in most of the cities and towns have come down), we have to ward off a US like situation in India, when the people will rather forego property rather than paying the increased burden of  EMI.

All said, RBI has its own system to monitor the state of the economy. Some of the reports appearing in newspaper columns may be colored or being planted by the vested interest. The decisions of the RBI should be balanced  since there are a whole lot of honest people who are depending on their hard earned money in fixed deposits and similar instruments to  make their both ends meet. Any reduction in deposit rate will reduce their income considerably. The worst thing is that their voice is seldom heard in the public domain.

  

The People´s Bank of China decided to cut its benchmark one-year lending rate by 40 bps to 5.6 percent on November 21st. It is the first rate cut in more than two years as the economy slows.

The one-year lending rate was cut by 40 bps to 5.6 percent and the one-year deposit rate by 25 bps to 2.75 percent, effective November 22nd. Policymakers also decided to increase ceiling for deposit rates to 1.2 times the benchmark rate from the previous 1.1 times.

China’s central bank is said to be injecting CNY 500 billion (USD 81 billion) into the banking system, aiming to support credit and growth. Published on 2014-09-17