Is lower interest rate need of the hour?

Lower interest rate for helping industry in India

Yesterday, we found all industry leader asked lower interest rates to help big companies.

As far as a non financial person, I understand they are asking for consumer loan at lower interest rates so consumer can borrow from banks and buy their products.

In this economic crisis, pushing the demand on borrowed money is safe or dangerous ?

US people rides [sic] on borrowed money for long and that trigered sub prime crisis - will history get repeated here in India as well?

What can happen is

few job cuts -> people without monthly income -> can't pay EMI (irrespective whether loan is at higher interest rate or lower) -> banks are in trouble because of bad debts

is demand of industry leader is justified for lower interest rate ??         

Well intersting question posed by Vikas ...

My take :

Let’s first understand what has happened to the Indian economy. Has anything so grossly wrong happened to our economy? I don’t think so. If you follow the financial results then u will see that still most of the companies have shown rise in profits in successive quarters. However, their stock prices are going down. Y is this happening? 

Western financial institutions with very high exposure to sub-prime loans went bust. These companies were highly leveraged. Now many of them have gone bankrupt and others have been left bleeding. They had to liquefy their assets to pay back their debts and they had no choice but to pull out from their money from the Indian market. That is exactly what they are doing n it’s not bcos now they av lost confidence in Indian corporate but they av no other choice. 

Well, as the market came down crashing due to FIIs so did the confidence of Indian domestic investors. Also as your asset prices drop so does your tendency to splurge. This is simple phenomena. Thus demand goes down. So we need to understand here is that there is no real problem with the Indian economy. May be I should just repeat what Paul Krugman always says “Bad things can happen to good economies”. This is the time when Gov. should act to boost demand. There is nothing wrong with Indian corporate… 

So here I support slight lowering of interest rates to boost domestic demand. In any case our interest rate is still high compared to western economies. You might say that it will trigger inflation. I would say it will not. The inflation we saw in recent past was more bcos of the cost push (soaring oil prices and bullish commodity market which pushed prices). Now commodity market has seen correction and oil is trading low as well… So there is not much reason for a cost push inflation. Moreover, we are already seeing a drop in demand which will need an adequate boost and it isn’t likely that this boost in demand will suddenly go so high that it will bring demand pull inflation.

Now when the question of inflation is out, let’s see the scenario of job cuts that you have pointed out. If you notice we have heard of job cuts in int’l markets primarily in the financial sector. I haven’t heard of too many layoffs in IT/Auto/Manufacturing, etc . In India, Jet and Kingfisher (KF) have gone for major layoffs (Though now they av reinstated their employees). I believe their situation has got more to do with the cut throat competition in the aviation industry, low operating margin and soaring oil prices. They have hundreds of crores of unpaid bills to AAI and oil co. To add to it, KF is again a very highly leveraged company. So what can happen in such period is that losses of a not so financially sound firm can get amplified.

These are minor fall offs of a global financial crisis. So my suggestion would be to cut interest rate, boost demand. It would not trigger inflation. There is nothing wrong with Indian corporate across sectors. Indian banks are sound. They are transparent. Top 10 Indian banks have less than 2% of NPAs. Even few job cuts can’t derail this economy.

BTW u just need to wait and watch, the interest rates will come down sooner than later. There is no way RBI will let liquidity crunch in global market disrupt our economy so easily.