Loading...

Top
Help
×

By creating an account you can:

Logo TaxTMI
Call Us / Help / Feedback

Contact Us At :

E-mail: [email protected]

Call / WhatsApp at: +91 99117 96707

For more information, Check Contact Us

FAQs :

To know Frequently Asked Questions, Check FAQs

Most Asked Video Tutorials :

For more tutorials, Check Video Tutorials

Submit Feedback/Suggestion :

Email :
Please provide your email address so we can follow up on your feedback.
Category :
Description :
Min 15 characters 0/2000
Make Most of Text Search
  1. Checkout this video tutorial: How to search effectively on TaxTMI.
  2. Put words in double quotes for exact word search, eg: "income tax"
  3. Avoid noise words such as : 'and, of, the, a'
  4. Sort by Relevance to get the most relevant document.
  5. Press Enter to add multiple terms/multiple phrases, and then click on Search to Search.
  6. Text Search
  7. The system will try to fetch results that contains ALL your words.
  8. Once you add keywords, you'll see a new 'Search In' filter that makes your results even more precise.
  9. Text Search
Add to...
You have not created any category. Kindly create one to bookmark this item!
Create New Category
Hide
Title :
Description :
❮❮ Hide
Default View
Expand ❯❯
Close ✕
🔎 News - Adv. Search
TEXT SEARCH:

Press 'Enter' to add multiple search terms. Rules for Better Search

Search In:
Main Text + AI Text
  • Main Text
  • Main Text + AI Text
  • AI Text
Category: ?
Categorized by AI
---- All Categories ----
  • ---- All Categories ----
  • Income Tax
  • GST
  • Customs, DGFT & SEZ
  • FEMA & RBI
  • Corp. Laws, SEBI & IBC
  • PMLA, Black Money & ED
  • Budget
  • News and Press Release
  • PTI News
Month:
---- All Months ----
  • ---- All Months ----
  • January
  • February
  • March
  • April
  • May
  • June
  • July
  • August
  • September
  • October
  • November
  • December
Year:
---- All Years ----
  • ---- All Years ----
  • 2026
  • 2025
  • 2024
  • 2023
  • 2022
  • 2021
  • 2020
  • 2019
  • 2018
  • 2017
  • 2016
  • 2015
  • 2014
  • 2013
  • 2012
  • 2011
Sort By: ?
In Sort By 'Default', exact matches for text search are shown at the top, followed by the remaining results in their regular order.
Relevance Default Date
    Rupee falls 8 paise to 95.25 against US dollar in early trade
    APEDA Facilitates First-Ever Export of GI-tagged Mithila Makhana by Sea Route from Bihar to Australia
    Government signs strategic MoUs with key industry leaders and ecosystems to strengthen support to StartUps
    No Charges for UPI Users
    Competition Commission of India (CCI) hosts BRICS Heads of Competition Authorities 2026 meeting
    ICoAS fraternity reaffirms commitment to cost optimisation for Atmanirbhar Bharat on ICoAS day 2026
    Govt to introduce bill in Lok Sabha to broaden NCDC's mandate for co-operative sector growth
    AAP govt indulged in large-scale financial irregularities, caused losses to exchequer: Delhi minister
    ED files chargesheets in 2 PMLA cases against Anil Ambani Group companies, ex-executives
    RJD criticises UDF govt's move not to disburse pensions through cooperative banks
    Raymond Limited reports a healthy Q1 FY27 performance
    Why Most People Choose the Wrong Savings Account And How Not to Be One of Them
    RBI has proactively helped UCBs; cooperatives should look at regulator differently: Shah
    Ministry of Agriculture, Food and Rural Affairs and aT Host '2026 K-Food Fair in New Delhi, India'
    No compromise on tackling illegal immigrants' issue: Minister Priyank Kharge
    Technology, transparency key for urban cooperative banks to stay competitive: Shah
    Paul Merchants Gets RBI Approval for Perpetual AD Category-II Licence Under Revised FEMA Framework
    IEPFA Organises Stakeholder Engagement with Nodal Officers of Companies on Integrated IEPFA Portal 2.0
    Rupee settles with 5 paise gain at 95.17 against US dollar
    India weathered Hormuz disruption without fuel shortages: Puri
❯❯
Maximize Maximize Maximize
0 / 200
Expand Note
Add to Folder

No Folders have been created

+

Are you sure you want to delete "My most important" ?

NOTE:

News
Showing Results for :
Reset Filters
Results Found:
Show All Summaries Hide All Summaries
August 10, 2026
Show AI Summary
Foreign-exchange market conditions weakened the rupee as stronger dollar and crude prices offset support from reserve growth and inflows.
Foreign-exchange market conditions saw the rupee weaken against the US dollar in early trading, influenced by a stronger dollar and higher global crude oil prices. Foreign institutional equity inflows and increased foreign-exchange reserves moderated pressure on the rupee. Market attention remained focused on developments in West Asia and the Reserve Bank of India, alongside movements in the dollar index, crude oil prices and domestic equity markets.
August 10, 2026
Show AI Summary
GI-tagged Mithila Makhana export facilitation expands sea-route market access while supporting quality compliance and farmer-linked value chains.
Export facilitation for GI-tagged Mithila Makhana enabled the first commercial sea-route shipment from Bihar to Australia. APEDA, in association with the Bihar agriculture department, supported market access, coordination, capacity building and stakeholder engagement. The export model is intended to improve farmer price realisation, require adherence to global quality standards, and strengthen growers, processors and exporters. A separate HS Code for Makhana has taken effect under the Finance Bill, 2025, supporting product-specific trade classification.
August 10, 2026
Show AI Summary
Startup ecosystem support expands through digital payments, cloud access, AI innovation, investment readiness, governance support and global market programmes.
DPIIT has entered into strategic MoUs to support DPIIT-recognised startups through payment infrastructure, entrepreneurship development, cloud technology, mobility innovation, investment readiness and global-market access. Eligible startups may receive payment and cloud support, technical training, mentorship, startup formalisation assistance, market and investor connections, AI and mobility enablement, and programmes addressing governance, financial readiness, compliance and international expansion. The collaborations promote innovation across digital payments, clean energy, artificial intelligence, climate technology, advanced manufacturing, mobility and automotive technology.
August 10, 2026
Show AI Summary
UPI transaction charges remain unavailable for consumers and person-to-person payments, while limited threshold-based merchant MDR may be considered.
Proposed amendment of section 10A of the Payment and Settlement Systems Act, 2007 is intended to support UPI sustainability, technological advancement and resilience. Consumer payments and person-to-person transactions are to remain free. Any future merchant discount rate would apply only to limited merchant transactions above a threshold, at a nominal rate, while most merchant transactions remain free. The framework supports investment in cybersecurity, fraud prevention and infrastructure, alongside a self-sustaining and inclusive digital-payment ecosystem.
August 10, 2026
Show AI Summary
Fair competition cooperation in renewable energy markets advances knowledge-sharing and evidence-based enforcement across interconnected digital and energy markets.
BRICS competition authorities adopted a Joint Statement strengthening cooperation to promote fair competition, including in renewable energy markets. Cooperation focuses on dialogue, knowledge-sharing and consideration of cross-border competition challenges in digital markets, emerging technologies and the energy transition. Competition enforcement is to remain principled and evidence-based, supporting efficiency, consumer welfare, innovation and merit-based competition. A collaborative renewable-energy competition study identified evolving market dynamics and areas for future cooperation.
August 10, 2026
Show AI Summary
Cost optimisation in public finance strengthens investment decisions, risk allocation, indigenous manufacturing and value-driven government expenditure through specialised financial expertise.
ICoAS cost optimisation supports public financial management through prudent resource utilisation, financial oversight and improved cost management across government. Its role includes supporting indigenous manufacturing, better investment decisions, efficient public expenditure and maximum value for public spending. With greater private-sector participation and Public-Private Partnerships, ICoAS officers are expected to promote cost efficiency, appropriate risk allocation and sound project structuring. Capacity building emphasises integrity, financial modelling, data visualisation, analytical frameworks and artificial intelligence for improved public-finance management.
August 9, 2026
Show AI Summary
Co-operative development financing would expand through direct assistance, share-capital participation and wider operational powers for sectoral support.
National Cooperative Development Corporation (Amendment) Bill, 2026 proposes to broaden the Corporation's mandate to promote co-operative development. It would permit direct loans and grants to co-operative societies and other entities engaged in co-operative development, where funds are used for co-operative purposes. With Central Government approval, the Corporation could participate in the share capital of such entities. The proposals also expand the meaning of foodstuffs, remove geographical restrictions for industrial-goods assistance, and provide additional functional powers.
August 9, 2026
Show AI Summary
GST compliance failures and electricity subsidy controls raise allegations of financial irregularities and potential losses to the public exchequer.
Allegations based on a Comptroller and Auditor General report identified purported GST compliance failures involving outstanding tax liabilities, e-way bills generated after cancellation of GST registrations, limited bill scrutiny, non-compliance, and turnover mismatches. The allegations also concerned electricity subsidies extended to consumers with prolonged zero bills or apparent non-residence, presenting these issues as possible financial irregularities and losses to the public exchequer.
August 9, 2026
Show AI Summary
Money-laundering prosecution complaints allege fund diversion through shell entities, credit-facility evergreening, layered transactions and fictitious project expenditure.
Money-laundering prosecution complaints allege that funds from toll-road projects and credit facilities were diverted through group companies, contractors, shell entities and conduit accounts. In the toll-road matter, allegedly sham or back-dated subcontracting arrangements and subsequent documentation were used to portray transfers as genuine project expenditure. In the credit-facilities matter, fresh facilities were allegedly used to repay, rotate and evergreen earlier liabilities rather than for sanctioned end-use, with funds layered and presented as legitimate business expenditure or receipts. Attached assets are sought to be confiscated as alleged proceeds of crime.
August 9, 2026
Show AI Summary
Direct Benefit Transfer pension disbursement replaces cooperative-bank doorstep delivery, while preserving home payments for beneficiaries unable to use bank accounts.
Direct Benefit Transfer of social security and welfare pensions to Aadhaar-linked bank accounts is intended to replace cooperative-bank doorstep delivery, except for bedridden and similarly situated beneficiaries. The change addresses delays in remitting undistributed pensions, deficient record updates and reconciliation, duplicate payments, delivery incentives, and compliance with Direct Benefit Transfer norms. Criticism focuses on beneficiary access to linked commercial-bank accounts, possible minimum-balance deductions, exclusion of cooperative banks, and the effect on doorstep-delivery workers.
August 8, 2026
Show AI Summary
Engineering business growth supported Raymond's first-quarter performance, with export expansion, capacity investment and net-debt-free financial flexibility.
Raymond Limited reported unaudited first-quarter FY27 growth in total income, EBITDA and profit before tax before exceptional items, while remaining net-debt-free with a net cash surplus. Its Engineering business comprises Precision Technology & Auto Components and Aerospace & Defence. Growth in the former was attributed to export expansion, operating leverage, product mix and cost reductions. Aerospace & Defence growth was linked to production for global OEMs, portfolio expansion and increased capacity, although margins were affected by targeted research and development investment. Forward-looking statements remain subject to regulatory, political, economic and technological risks.
August 8, 2026
Show AI Summary
Savings account selection requires comparison of effective interest, fees, digital service, access, and individual banking needs.
Savings-account selection should compare effective interest returns under slab-based rates, recurring operating charges and the customer's actual banking needs. Net value depends not only on advertised rates but also on relevant minimum-balance, card, ATM, alert and transfer fees. Digital reliability, customer support, branch availability and ATM access should be assessed according to the customer's average balance, cash use, transfer frequency, travel patterns and need for in-person assistance. The suitable account is one that matches real banking behaviour.
August 8, 2026
Show AI Summary
Urban cooperative bank regulation promotes licensing, governance, compliance support and cybersecurity measures to strengthen stability and depositor confidence.
Urban cooperative banks are encouraged to recognise regulatory support through liberalised branch opening, doorstep banking, demand drafts, life certificates, dedicated regulatory coordination, enhanced gold-loan limits, one-time settlements and progress towards on-tap licensing. Sound governance is material to sectoral stability, while small-borrower lending is presented as a comparatively safe lending segment. The umbrella body can support member banks through technical expertise, compliance assistance, cybersecurity solutions and participation in a security operations centre to strengthen depositor confidence.
August 8, 2026
Show AI Summary
Korean food export promotion combines buyer consultations, regulatory guidance and consumer experiences to support entry into Indian and South Asian markets.
Korean food export promotion in India and South Asia combined business consultations with consumer-facing activities. Individual meetings connected Korean exporters with regional buyers and generated memoranda of understanding for products including frozen gimbap, ginseng wine and kombucha. Exporters received on-site guidance concerning non-tariff barriers, including food import customs clearance and certification requirements. Preparatory online sessions addressed import procedures, regulatory matters and consumer trends, while consumer events promoted Korean food through tasting, retail and experiential activities.
August 8, 2026
Show AI Summary
Illegal immigration enforcement prioritises dismantling entry, documentation and employment networks while requiring citizens to report information through police channels.
Illegal immigration enforcement involves continuous identification and verification operations, coordination with relevant officials, and confidential investigation of networks facilitating entry, identity documentation, accommodation and employment. Enquiries extend to intermediaries, contractors, Aadhaar procurement and verification practices, rather than focusing only on apprehended individuals. Citizen vigilantism, moral policing and social-media targeting of suspected migrants are discouraged because they may compromise investigations; information should instead be given through proper police channels.
August 8, 2026
Show AI Summary
Technology, transparency and governance strengthen urban cooperative banks through modern customer services, depositor protection and cooperative-sector support.
Technology adoption, transparency, sound governance and modern customer services are identified as necessary for urban cooperative banks to remain competitive. Banks are encouraged to join the sector's umbrella organisation and self-regulatory body, which provides capital, information-technology infrastructure and liquidity support. Protection of depositors' money remains a regulatory responsibility, while banks are expected to improve governance, train staff, adopt technology and enhance customer-centric services. Customer prosperity and reduced perception gaps between the central bank and urban cooperative banks are emphasised as measures to strengthen the sector.
August 8, 2026
Show AI Summary
Authorised Dealer Category-II licensing expands permissible FEMA current account and foreign trade transaction services for cross-border payment customers.
An Authorised Dealer Category-II approval under the Foreign Exchange Management (Authorised Persons) Regulations, 2026 enables Paul Merchants to undertake additional permissible non-trade current account transactions under FEMA, excluding gifts and donations, and foreign trade transactions within the applicable per-transaction limit. The approval supports foreign exchange and cross-border payment services, including overseas remittances for education, medical treatment, travel, and conference or event participation.
August 8, 2026
Show AI Summary
Integrated investor claim portal modernisation advances digital KYC, streamlined verification, stakeholder-informed safeguards, and efficient investor claim settlement services.
Integrated IEPFA Portal 2.0 is proposed to modernise investor claim processing through digital KYC, pre-filled Form IEPF-5, entitlement search, and a simplified e-Verification Report filing workflow. Stakeholder feedback included Aadhaar eKYC address validation, KYC for authorised representatives, entitlement-letter validation checks, bulk DSC and eSign functionality, integration of approved IEPF Form-4 data, lower-value share valuation using NSE and BSE data, and alerts for frequent address changes to prevent fraud.
August 7, 2026
Show AI Summary
Foreign capital inflows supported the rupee despite geopolitical uncertainty, oil-price pressures, and volatile global market sentiment.
Foreign capital inflows supported a marginal strengthening of the rupee against the US dollar despite global risk aversion arising from uncertainty surrounding negotiations affecting the Strait of Hormuz. Higher crude oil prices and weak domestic equity sentiment remained relevant pressures. Near-term currency movement was expected to depend on developments in the negotiations, weekend decisions, US employment data, the dollar index, crude oil prices, and the reported increase in foreign exchange reserves.
August 7, 2026
Show AI Summary
Energy security through diversified sourcing protected fuel supplies during Hormuz disruption and supports domestic exploration and alternative fuels.
Energy security measures based on diversified crude oil and LPG sourcing, expanded infrastructure, increased domestic LPG production and alternative fuels were presented as maintaining fuel availability during disruption of shipping through the Strait of Hormuz. Domestic resilience is also linked to support for private deep-water oil and gas exploration, opening offshore acreage, and expansion of compressed biogas and ethanol blending. Ethanol-blended petrol testing identified limited contamination instances rather than a systemic issue, while excise duty reductions were described as cushioning consumers against global fuel-price volatility.

News

Back

All News

Showing Results for :
Reset Filters
No Records Found

News

Back

All News

Showing Results for : Reset Filters

Interest Rates and Economic Activity (Speech by Shri Deepak Mohanty, Executive Director, Reserve Bank of India, delivered to the Association of Financial Professionals of India (AFPI), Pune, August 23, 2013)

August 24, 2013

Contents
Summary
Note

Note

-

Bookmark

Print

Print

I thank Ms. Preeta Misra, Director & Member Secretary, Association of Financial Professionals of India (AFPI) for this opportunity to interact with distinguished professionals of corporate India. In the recent period, there has been an animated debate on the role of interest rates in influencing real economic activities. In particular, the discussion has been on how a change in policy interest rate impacts the lending rates, and thereby industrial performance and overall economic activity. In this context, the last decade through 2012-13 has been eventful with rapid changes in the monetary policy stance responding to the evolving growth-inflation dynamics. This is a period in which we recorded one of our highest output growth rate as also one of the lowest. Inflation showed significant variation. We also experienced the global financial crisis, the adverse effects of which are still lingering.

As you know, Indian economy is currently passing through a very challenging phase: growth has slowed; though wholesale price inflation has come down consumer price inflation remains close to double digits, and financial market volatility has increased. A major factor in the recent growth slowdown is a significant deceleration in private corporate investment. Since you are the key professionals taking investment decisions, I thought it will be relevant to discuss how does monetary policy decisions, through interest rate changes, affect investment decisions and thus economic activity? Another motivation for this subject is that colleagues in the Reserve Bank have done substantial research in this area and a paper entitled “Real Interest Rate Impact on Investment and Growth: What the Empirical Evidence for India Suggests?” was placed in the public domain. I will urge you to look at that paper so that it generates further research and discussion.

Against this background, my presentation will be as follows: I will briefly review the stance of monetary policy and economic outcome during the last decade through 2012-13; discuss monetary transmission with a focus on the interest rate channel; and examine the impact of interest rate changes on economic activity both at the macro and micro levels.

Changes in monetary stance

In the last 10-year period from 2003-04 to 2012-13, monetary policy response can be broadly categorised into four phases based on growth-inflation outcome and the rapidly changing monetary policy response:

  • Phase I of 5 years of 2003-08 of high growth but rising inflation concern towards the later part of the period when repo rate was raised from 6 per cent to 9 per cent and the cash reserve ratio (CRR) was raised from 4.5 per cent to 9 per cent.
  • Phase II of 2 years of 2008-10 following the global financial crisis when the repo rate was reduced from 9 per cent to 5.25 per cent and CRR was reduced from 9 per cent to 5.75 per cent.
  • Phase III of 2 years of 2010-12 of monetary tightening responding to rising inflation when policy rate was raised from 5.25 per cent to 8.5 per cent but CRR was reduced to 5.5 per cent.
  • Phase IV of over a year of monetary easing in 2012-13 and 2013-14 so far with the repo rate reduced to 7.25 per cent and CRR lowered to 4.0 per cent; though since mid-July 2013, the RBI has tightened the monetary and liquidity conditions without changing the policy repo rate and CRR to address exchange market volatility.

Monetary policy stance in any particular phase is generally conditioned by the growth-inflation balance, the outlook for growth-inflation in a forward looking context and an assessment of macroeconomic risks. Essentially, monetary policy aims at attaining high growth in a non-inflationary manner. But at times high growth in excess of potential growth could trigger inflation putting the sustainability of the very growth path to risks. Hence, monetary policy tends to do a careful balancing act so that it is not too accommodative of growth in excess of its potential and at the same time not too stimulative of inflation. However, there could be periods of rising inflation and falling growth below its potential. This could arise from several sources such as the lagged impact of policy stimulus from earlier phases and adverse supply shocks, both domestic and external, which persist.

The challenge of rebalancing growth and inflation is evident from the four phases of growth-inflation presented in Table 1 and Chart 1. In the first phase, high growth coincided with low inflation. However, towards the latter part of the period as inflationary pressures rose it warranted monetary tightening. In the second phase, reflecting the impact of global financial crisis, growth decelerated and weak commodity prices globally and relatively stable exchange rate contained inflation. That created the space for monetary easing. In the third phase, India recovered ahead of the global economy, and actual growth in 2010-11 at 9.3 per cent exceeded significantly the post-crisis estimated potential growth of 7.5-8.0 per cent. With a sharp recovery in growth, inflation too caught up rapidly, partly complicated by a rebound in global commodity prices. The anti-inflationary thrust of monetary policy became unavoidable to contain inflation and anchor inflationary expectations.

Table 1: Post-crisis as growth recovered inflation picked up

(y-o-y growth in per cent)

 

2003-08

2008-10

2010-12

2012-13

2013-14 Q1

GDP Growth

• Average of Annual Growth

8.7

7.7

7.8

5.0

..

• Quarterly Range
          • Max
          • Min


11.3
5.3


11.2
3.5


10.1
5.1


5.4
4.7


..
..

WPI Inflation

• Monthly Average

5.5

6.0

9.3

7.4

4.7

• Monthly Range
          • Max
          • Min


8.5
3.2


11.1
-0.4


10.9
7.2


8.1
5.7


4.9
4.6

Policy Repo Rate (per cent)

• Period Range
          • High
          • Low


9.00*
6.00


9.00*
4.75


8.50
5.00


8.50
7.50


7.50
7.25

..: Not Available *:In July 2008 - prior to the spill over of global crisis to India.

 

In the fourth phase, softening of inflation created space for monetary easing. However, growth is yet to pick up reflecting both weak global demand, domestic supply constraints and slowdown in corporate investment. In this context, the role of monetary policy has also come to the fore: the question being to what extent monetary policy has played a role in the growth slowdown? Let me try to address this issue.

Monetary policy transmission

While there is considerable attention even to small changes in policy interest rate, the question is: does this really matter? The response to this question lies in an assessment of how does this policy rate changes affect market rates, particularly the cost of credit, and ultimately impacts the investment and consumption decisions of economic entities. Apart from market rates, expectations about future outcomes play an important role. There could also be transmission lags. Moreover, the magnitude of change in market interest rates may be different, ranging from money market rates to lending rates.

While policy rate changes do matter, it is not that straight forward as to how they impact lending rates in the transmission chain. In this context, how policy rate changes, impact bank deposit rates become important as banks rely on cost plus pricing of their loan products. Apart from cost of deposits, banks also load a risk premium which may change in different phases of the business cycle, and therefore, the lags could be longer. Hence, how fast the banks are able to change these parameters would largely determine the changes in their lending rates. Thus, nominal lending rate determination in the market is a complex process, and how changes in lending rates impact overall growth is even more uncertain. This is the reason why monetary policy transmission is often dubbed as a “black box”. Hence, explaining monetary transmission is a constant challenge for every central bank.

Let me now turn to the issue of transmission of monetary policy in India. In the last few years, there have been several empirical studies, examining the interest rate channel of monetary transmission. The general conclusion from these studies is that increases in policy rate have a statistically significant negative impact on output and moderating impact on inflation. However, the negative effect of a policy rate increase is first felt on output before the moderating impact on inflation. The lags in policy rate changes on output are 2-3 quarters and on inflation 3-4 quarters. The total impact on policy change could, however, linger for 8-10 quarters.

A notable feature of monetary policy transmission in India is the asymmetry one observes during different phases of a monetary policy cycle. Usually, during a phase of rising policy rate, banks may be quick in raising their lending rates while in a phase of falling policy rate, banks may be slow in reducing their lending rates as cost of deposits does not adjust commensurately given the fixed nature of deposit contracts. This pattern reflects that loans, being mostly at variable rates, can be re-priced at a quicker pace than the fixed rate bank deposits.

The asymmetric transmission also needs to be seen in relation to overall liquidity conditions. For example, in a tight liquidity condition, even if the policy rate is reduced banks may not be in a position to reduce deposit rates and hence lending rates with the apprehension of losing deposits. There could be other considerations for not lowering deposit rates if rates of return in competing products such as small savings and mutual funds are more attractive. Another consideration in a falling interest rate scenario could be that banks might want to protect their profit margin through a more sluggish adjustment of their lending rates.

Notwithstanding various complexities, the interest rate channel of monetary transmission has been evident over the monetary policy cycles in the recent years. The policy interest rate changes did impact the market interest rate in the same direction, though at varying intensity. The magnitude of changes in lending rates, however, more closely followed the changes in deposit rates (Table 2).

Table-2: Transmission to the money market rates was much faster than to lending rates

Items

Variation (percentage points)

Tightening Phase

Easing Phase

Tightening Phase

Easing Phase

Phase I

Phase II

Phase III

Phase IV*

Policy Rate (Repo Rate)

3.00

-4.25

3.75

-1.25

Cash Reserve ratio (CRR)

1.75

-0.75

-1.00@

-0.75

Call Rate

5.58

-7.19

5.66

-1.93

CBLO Rate

2.71

-4.57

5.29

-1.34

Market Repo Rate

3.37

-5.08

5.37

-1.52

3-Month CP Rate

8.19

-7.85

5.51

-3.11

3-Month CD Rate

2.02

-7.54

5.58

-2.95

5-Year Corporate Debt Yield

4.95

-3.49

0.86

-0.92

10-Year Corporate Debt Yield

6.70

-6.25

3.16

-1.11

5-Year G-Sec Yield

1.23

-0.36

0.92

-0.94

10- Year G-Sec Yield

0.72

0.07

0.44

-1.02

Modal Deposit Rate

2.38

-2.38

2.42

-0.16

Modal BPLR/Base Rate #

3.00

-2.00

2.75

-0.50

# : Base Rate since July 1, 2010.

Phase I : Oct 26, 2005 to Oct 19, 2008

Phase II : Oct 20, 2008 to Mar 18, 2010

Phase III : Mar 19, 2010 to Apr 16, 2012

Phase IV : Apr 17, 2012 to Jun 30, 2013

@ CRR was cut to create the desirable liquidity conditions ahead of the repo rate cuts in Phase-IV.
* Post July 15, 2013 period is not included when market interest rates responded to monetary measures aimed at addressing exchange rate volatility.

Nominal or real interest rate?

Another aspect of monetary transmission is whether it is the nominal interest rate or the real interest rate that can influence growth and investment. In the literature, the stance of monetary policy is judged as loose or tight depending on the level of real policy rate. Most economists believe that it is the real interest rate that could influence real economic activity. However, as individuals and corporates we take economic decisions looking at the nominal rates as these are the rates that we can observe. Is it that these are two distinct concepts? I do not think so. Notwithstanding apparent differences, is it not that at the back of our mind there is no inflation metric while planning an investment project, howsoever different it may be for different entities? Is it not a fact that a negative real interest rate favours debtors whereas a positive interest rate favours creditors?

The link between the real interest rate and nominal interest rate is provided by the famous Fisher equation which postulates that the nominal interest rate is the sum total of a real interest rate and expected inflation. One implication of this is that the nominal interest rates should move in tandem with inflation. In the real world, nominal interest rates may not change one for one with the inflation rate but the direction more often is similar. Countries with higher inflation tend to have higher nominal interest rates than countries with lower inflation. Accordingly, the nominal interest rates in advanced countries tend to be lower than in emerging market and developing countries.

While the notion of a real interest rate poses conceptual difficulties, the compilation of a real lending rate is even more difficult. It involves two steps: first to compute an effective nominal lending rate, and second to deflate it with an appropriate inflation metric. In our context, while the base rates of banks generally provide the floor to their lending rates actual borrower specific lending rates are different. Estimates of weighted average lending rate (WALR) of banks both in nominal and real terms are presented in Chart 2. The real rates are obtained by deflating the nominal rates by the annual average wholesale price inflation.

During the period of the high growth phase of 2003-08, WALR of all scheduled commercial banks stood at 12.4 per cent, which dropped to 11.0 per cent during the crisis period of 2008-10. Subsequently, it went up and has remained around 12 per cent thereafter (Chart 3). WALR in real terms declined sharply from 6.9 per cent in the high growth phase of 2003-08 to 5.0 per cent in the crises period of 2008-10. It fell further to 2.7 per cent during 2010-12 period and then went up to 4.8 per cent in the subsequent period. Despite stickiness in the nominal interest rate, the reduction in the real rate was higher as inflation on an average turned out to be higher. However, in 2012-13 as inflation showed a significant moderation the real lending rate has risen.

Why did the investment growth slacken despite moderation in real lending rates? In this context, let me now turn to micro-level corporate finance data of a fairly large diversified sample. The analysis shows that interest cost as a ratio of sales went up from 2.6 per cent in the high growth phase of 2003-08 to over 3 per cent during the crisis period of 2008-10. However, during this period the average sales growth declined from about 21 per cent per annum to 15.7 per cent. Following subsequent recovery to 19.5 per cent per annum, it has plummeted to 9.5 per cent in 2012-13. Consequently interest cost to sales ratio rose to 3.8 per cent. It will thus seem that deceleration in sales growth has accentuated the interest burden on the corporates at the micro level.

The Reserve Bank study I cited earlier suggests that for 100 basis point increase in real interest rate, investment rate may decline by 50 basis points and real GDP growth may moderate by 20 basis points. As indeed the real interest rate has moderated in the post-crisis period, it should not have had a large negative impact on investment, but for significant deterioration in the prospects of return on investment driven by non-monetary factors.

Decline in Marginal Efficiency of Capital

In this context, let me turn to the investment decision at the firm level. This is an area in where you are better informed than me. At the firm level, investment decisions may be driven by a comparison of the internal rate of return (IRR) with the hurdle rate. As long as interest rate is lower than IRR, additional investment may continue. While IRR is seen in nominal terms, marginal efficiency of capital (MEC) which is measured in real terms plays an important role. In a phase of sustained slowdown in economic growth, non-monetary factors may lower MEC faster than the extent to which interest rate may decline. As a result, despite a lower interest rate, investment may not pick up. The fall in IRR could be driven by adverse shocks to cash flows and deterioration in macroeconomic conditions.

At the macroeconomic level supply bottlenecks and sluggish demand can depress MEC, which can more than offset the beneficial impact of a lower lending rate on investment and growth. The incremental capital output ratio (ICOR) has been rising in India in the last four years since 2008-09. The implicit marginal productivity of capital (MPC), which is the inverse of ICOR, accordingly has been declining (Chart 4).

Conclusion

Let me conclude. The Reserve Bank has been traversing a growth-inflation knife edge in recent years. The sluggish growth conditions in the last two years and the dampened investment activities warranted a shift in the stance of monetary policy. The extent of monetary policy easing, however, has been circumscribed by the persisting risks to inflation and the external balance position. Price stability and exchange rate stability are necessary preconditions to sustainable high growth. Furthermore, when non-monetary factors are impeding a robust revival in growth, lower real or nominal interest rates may not be just enough to stimulate growth.

Topics

Acts Income Tax