With little headroom to cut interest rates, the Finance Ministry and the RBI are considering a plan to give cheaper funds to banks to lend to the auto and housing sectors as the festive season approaches.
"The Finance Ministry is evaluating a scheme launched by the Bank of England wherein it provides funding to banks and building societies at lower rates," a ministry official said.
Reserve Bank of India Governor Raghuram Rajan, who will present his maiden policy on September 20, held discussions yesterday with Prime Minister Manmohan Singh and Finance Minister P Chidambaram on the macro-economic situation.
"The RBI has constant consultations with the Finance Ministry. This meeting was part of that. We discussed the whole gamut of issues," Rajan told reporters after meeting Chidambaram.
The Bank of England launched the Funding for Lending Scheme in 2012, providing incentives for banks and building societies to boost their lending. Both the price and the quantity of funding provided are linked to their lending performance, according to the Bank of England website.
A similar scheme by the RBI and the government would allow consumers to access funds at lower rates to buy vehicles and houses and possibly boost the automobile and real estate sectors, which are bearing the brunt of slowing economic growth and demand compression.
At its previous policy review in July, the RBI kept key interest rates unchanged on account of a weak rupee. The repo rate stands at 7.25 per cent, the reverse repo rate at 6.25 per cent and the cash reserve ratio (CRR) is at 4 per cent.
This time, the RBI's options may be limited by the high rate of inflation and a volatile rupee. Wholesale prices in August climbed 6.1 per cent, the fastest pace in six months. The rupee, which depreciated to a record low of 68.85 against the dollar on August 28, has recovered some ground and closed yesterday at 63.37.
Industry has clamoured for a reduction, blaming the high interest rate regime for the slowdown. With the peak festival season around the corner, bankers are pressing for a cut in the CRR and policy rates to help boost demand for manufactured goods and revive sagging economic growth.
"We have recommended a cut in CRR, repo rate and asked the RBI not to restrict the MSF (marginal standing facility) to a particular number," State Bank of India Chairman Pratip Chaudhuri said yesterday.
Demand for loans is expected to rise in the festive season and bank loans would be cheaper if the RBI cuts interest rates, Indian Overseas Bank Chairman and Managing Director M Narendra said.