Monday, November 3, 2008

India unlikely to move towards zero interest rate

While expectations are building up for further rate cut in India as well, the bankers here believe that a zero-level rate does not seem likely even remotely.

“That (0% interest rate) looks very difficult in India. Given the liquidity situation and macroeconomic factors, interest rate below one per cent seems a highly unlikely proposition,” UCO Bank Chairman and MD S K Goel said.

But, it is not the case with the US and Japan, as well as some other economies where a zero-interest rate is being talked as quite a possibility in the current economic scenario when borrowers are hard to find and liquidity is not enough.

Under a zero interest rate policy, which is also known as Quantitative Monetary Easing Policy, a central bank uses money supply, rather than interest rate, as the main monetary easing tool.

When Japan slashed its benchmark rate to 0% for five years between 2001 and 2006, it was mainly to fight deflation concerns and revive economic growth.

However, a zero benchmark rate does not guarantee nil interest cost for consumers or corporate borrowers. It applies only to the banks parking their funds with the apex bank and borrowing from each other. The interest rates applicable to the consumers and corporate customers, however, tend to decline considerably.
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