Date:22/07/2006 URL: http://www.thehindu.com/2006/07/22/stories/2006072204521700.htm

Business

Interest rates likely to moderate, says FM

Special Correspondent

`Public sector banks have emerged stronger than ever'

NEW DELHI: Painting a rosy picture of the banking sector, Finance Minister P. Chidambaram on Friday said the public sector banks had emerged stronger than ever before with their bad debts significantly reduced and that he expected interest rates to moderate at tolerable levels.

Addressing a news conference here after his meeting with the public sector bank (PSB) chiefs ahead of the quarterly policy review by the Reserve Bank of India (RBI) next week, Mr. Chidambaram pointed out that with the rate of inflation coming down gradually, inflationary expectation would recede. "Interest rates have been rising. But the inflation data put out this morning show that the inflation rate has declined from 4.96 per cent to 4.68 per cent. This is a tolerable rate of inflation.

"This should dampen the inflationary expectations. If [the] inflation rate declines, then inflationary expectations should dampen and interest rates should moderate," Mr. Chidambaram explained and concluded that if the inflation rate remained moderate, "interest rates will moderate".

With the country's economy growing by about eight per cent, a "certain amount of inflation,'' he argued, was inevitable.

Despite this, however, Mr. Chidambaram categorically declared that inflation would be kept under check by the RBI through monetary policy measures along with other steps by the Government.

Mr Chidambaram also utilised the opportunity to explain why consolidation in the banking sector was the need of the hour even as the concept of mergers and acquisitions would have to be voluntarily imbibed by the PSB managements and unions jointly.

Noting that there was ample liquidity in the system and the RBI was maintaining its flow, the Finance Minister revealed that the banks' problem with regard to fund raising innovative instruments and Tier 11 capital had been resolved by a notification this morning by the central bank. On the strike threat by bank employees, Mr Chidambaram said it was "unfortunate and uncalled for".