FM calls for affordable loans, says cost of borrowing ‘stressful’

Mumbai: In what appears to be a concerted nudge for interest rate cuts, Union finance minister Nirmala Sitharaman on Monday called for bank lending rates to be more affordable, the second senior minister to highlight the matter in less than a week.

“Equally, I think what is important is when you look at India’s growth requirements, and you have so many voices coming out and saying the cost of borrowing is really very stressful…” Sitharaman said at a State Bank of India event. “…at a time when we want industries to ramp up and build capacities, our bank interest rates will have to be far more affordable.”

The central bank’s monetary policy committee (MPC) has held interest rates unchanged since February 2023, and sticky food inflation is expected to make it difficult to lower rates before February 2025. Given that 58% of all floating rate bank loans are linked to an external benchmark – mostly to the repo rate — consumers will see cheaper loans only when RBI cuts the benchmark rate.

Last month, Reserve Bank of India (RBI) governor Shaktikanta Das effectively ruled out a rate cut in the immediate future, given that headline inflation was expected to rise in October as well before it starts moderating. Mint reported that at a fireside chat organized by Bloomberg, Das cautioned that rate cuts at this stage would be “premature” and risky.

In October, retail inflation climbed to a 14-month high of 6.2%, overshooting the MPC’s flexible target of 2-6% and dashing hopes of a December rate cut.

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“Firm inflation, hawkish speak from the central bank and heightened global volatility confirm that rate cuts are off the table in December,”  Radhika Rao, senior economist, DBS Bank said in a note on 13 November.

Last week, Union commerce minister Piyush Goyal said that the “RBI must cut interest rates.” “It is a flawed theory to consider food inflation for making a choice on cutting rates,” a Hindu report quoting Goyal said. Goyal had qualified his statement, adding that it was his “personal view and not that of the government.”

RBI governor Shaktikanta Das, also present at the event where Goyal demanded rate cuts, said he would reserve his comments for the December monetary policy. The rate-setting panel will meet on 4-6 December.

Sitharaman said she does not want to get into a debate on whether perishables should be part of the inflation measurement index. In July, the Economic Survey for 2023-24 suggested excluding food prices from India’s inflation-targeting framework. Following the suggestion, governor Das had said on 8 August that given the high share of food in the consumption basket at 46%, food inflation pressures cannot be ignored.

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The current debate on excluding food from RBI’s inflation-setting framework centres around the MPC’s handicap on rising food prices, as these are caused by supply-side problems and not by demand issues which can be controlled by interest rate changes. The government, as part of its inflation-targeting mechanism, had in March 2021 retained RBI’s flexible inflation target in the 2-6% band for the five years through March 2026.

“We as a government are making a lot of efforts towards scientific and more rigorous storage facilities for perishable commodities. Till you really get on top of the issue, you will periodically have this problem of tomatoes, onion and potatoes causing immense stress in a cyclical fashion,” said Sitharaman, adding that inflation gets very volatile because of the supply-demand constraints.

Devika Ganu in Mumbai contributed to the story.