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Interest rates may fall by 1% more

Source: PTI
Last updated on: December 18, 2008 16:33 IST
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The Union finance ministry on Thursday said the falling inflation rate would result in further lowering of interest rates.

"The trend is clear for falling inflation and this will translate into lower interest rates," Economic Affairs Secretary in the Finance Ministry Ashok Chawla said while commenting on the inflation data.

Inflation, as per the official figures, dropped for the sixth consecutive week to a nine-month low of 6.84 per cent for the week ended December 6.

Nosediving of inflation to 6.84 per cent coupled with falling oil prices is likely to trigger more lending rate cuts -- up to 1 per cent by banks, economists said on Thursday.

"The current fall in inflation would put more pressure on banks to bring down their interest rates by additional one per cent across the board by March. There is a strong southward bias," Bank of Baroda's chief economist, Rupa Rege Nitsure said.

India's headline inflation fell to a nearly nine-month low of 6.84 per cent mainly on account of cut in domestic fuel prices after nearly 20 per cent decline in the global crude oil prices and declining prices of vegetables, fruits, pulses and iron, steel items.

Many state-owned banks and a few private sector banks had slashed their prime lending rates after the Reserve Bank of India's monetary measures rate and finance minstry's calls for immediate rate reductions.

Many private leading lenders including ICICI Bank, are yet to revise their rates and they may have to take a call now following the steep fall in inflation, Nitsure said.

Monetary policy makers in the Reserve Bank of India may now face different challenges if the pace of fall in the headline inflation continues in the remaining part of this fiscal, IDBI Gilts' Economist, Amol Agarwal said.

"The inflation at current level (6.84 per cent) is good as it has been the policy endeavour of RBI in the past few months. However, if the decline in the inflation continues in this pace, that may pause policy hurdles by mid-next year," Agarwal said.

Inflation spiralled to multi-year highs (around 13 per cent) early this year. High inflation and uncertain liquidity conditions prompted the RBI to infuse above Rs 3 lakh crore (Rs 3 trillion) liquidity into the system.

Given the current signals, the inflation is likely to contract to five per cent by the end of December and to zero by mid-next year, putting pressure on private banks to lower their lending and deposit rates, the chief economist of a leading private sector bank said.

"Interest rates will come down in the next few months, also among the private sector banks as they would, otherwise, face low demand for their products," he said.

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