Finmin, RBI play down differences over interest rates

NEW DELHI: Finance ministry and the Reserve Bank of India (RBI) on Thursday decided to play down their differences on interest rates, saying the direction from North Block was only to ensure that productive sectors were not starved of liquidity at a time when the economy was on high growth path.

There may be slight differences in perception on interest rates but it does not mean that that there is a rift between the ministry and RBI, senior ministry officials said.

RBI, too, felt it was not proper to read too much into the absence of its nominees from the recent board meetings of Bank of Baroda, Andhra Bank and Oriental Bank of Commerce, which reviewed interest rate hikes.

Finance ministry officials said, North Block’s intimation to PSU banks to seek board approvals for increasing prime lending rates was just to ensure that there was no shortage of credit for productive purposes.

The growth momentum should not be dampened through any slowdown of credit flow, they said. RBI, on the other hand, is of the view that inflation should be kept under control by sucking out excess liquidity from the system, sources said. As such, the central bank is not averse to some adjustments in interest rates, they added.

The finance ministry has based its view in the backdrop of 1997 East Asian currency meltdown, when South-East Asian countries had hiked interest rates as a measure to deal with liquidity situation, dampening the booming investments in those countries.

Also hike in home loan rates would not impact the economy as long as it was a correction to deal with speculative investments but realty sector is usually a driver of the economy and hence shortage of funds for genuine real estate development could have a negative impact, they felt.

Following the finance ministry’s letter, Bank of Baroda and Andhra Bank took the approval of their boards to hike PLRs, while Oriental Bank of Commerce decided to defer interest rate hike for home loans below Rs 20 lakh till September 30.

RBI nominees on the board of these three banks were absent, which was interpreted by many as a signal to the rift between the central bank and the ministry.