India urges banks to cut lending rates

India urges banks to cut lending rates

By Amy Yee in New Delhi

Published: February 13 2008 02:00 | Last updated: February 13 2008 02:00

India's finance minister yesterday urged banks to lower interest rates on loans for homes and consumer goods as the country's buoyant economy showed signs of losing steam.

"There is a feeling that adequate credit is not being provided to the housing sector and the consumer durables sector,'' said Palaniappan Chidambaram in New Delhi after meeting heads of state-run banks. "Banks have been asked to pay attention to provide adequate credit to these two sectors as they are drivers of the economy.''

Sales of motorcycles, cars and other expensive consumer goods fell sharply last year as the central bank tightened monetary policy to curb inflation.

In spite of the government's concern about consumption, the Reserve Bank of India last month left rates unchanged because of lingering concerns about soaring global oil and food prices.

The central bank's decision to maintain tight monetary policy contrasts with the government's push to maintain strong growth ahead of elections next year.

Inflation has eased from potentially alarming levels of more than 6.6 per cent early last year, with headline inflation falling back to 3.8 per cent in January.

Mr Chidambaram's second call in two months for lower lending rates came a day after the bull run in India's stock market ground to a halt.

Shares in Reliance Power plummeted as much as 21 per cent on its first day of trading on Monday after the company raised $3bn (€2bn, £1.5bn) last month in India's largest flotation. Reliance Power attributed its poor debut to the "meltdown" in global markets.

Several companies, including property developer Emaar MGF Land and hospital group Wockhardt, have shelved their market listings in India because of poor market conditions. India's benchmark Sensex Index has fallen about 20 per cent since the middle of January.

India's economy has shown signs of slower growth for the first time in three years, with official figures released last week projecting the growth rate for the year to March 2008 to be 8.7 per cent, down from 9.6 per cent the previous year.

Steady appreciation of the rupee by about 12 per cent since early last year has also hurt exports, especially in lower-margin sectors such as textiles.

"Exporters are losing orders as the strong rupee has priced out Indian exporters from the market," said a survey from the Federation of Indian Chambers of Commerce and Industry.

However, new government statistics released yesterday showed a rebound in industrial production following a slump late last year. It grew 7.6 per cent year-on-year in December compared with 5.1 per cent year-on-year in November.

Growth in consumer durable goods grew 2.2 per cent in December compared with a decline of 4.7 per cent in November. Non-durable goods jumped 10.6 per cent in December against a decline of 1.7 per cent in November.

Mr Chidambaram last month called on banks to lower interest rates in order to spur investment and spending.

Lenders decide their own interest rates and some have already responded. State Bank of India, the nation's biggest bank, will this week cut its benchmark prime lending rate by 25 basis points to 12.5 per cent.

The Housing Development Finance Corporation, one of the country's biggest mortgage lenders, this month reduced its retail prime lending rate by 25 basis points to 13.75 per cen