Keen to spur consumption demand before the festive season, the finance ministry has begun prodding banks to lower interest rates for consumers of select segments like televisions, refrigerators and two-wheelers. The ‘selective stimulus’ will be routed through higher capital infusion for public sector banks, which could get about Rs 4,000 crore over and above the budgeted figure of Rs 14,000 crore.
Will the strategy work? Says Pravin Bhat, CEO of Mahindra & Mahindra’s automotive sector: “In these difficult times, any sop is welcome.”
A report on the auto sector by brokerage firm Motilal Oswal Securities says demand continues to remain weak. “Two-wheelers are showing early signs of recovery led by favourable monsoon and strong demand from rural markets,” the report adds, saying festive buying provides some hope for the auto sector.
Kotak Mahindra Bank chief economist Indranil Pan is not so upbeat. “This move can only lead to price distortion. Whether it is sustainable beyond the festive season remains to be seen,” he says. Analysts are also confused as the RBI had, in its monetary policy review on September 20, increased the repo rate to send a signal that it was keen on tackling inflation.
Banks have already started lowering rates. State Bank of India, the country’s largest lender, Oriental Bank of Commerce, Punjab National Bank and Dena Bank have begun making consumer loans cheaper.
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(This story appears in the 01 November, 2013 issue of Forbes India. To visit our Archives, click here.)