Look at the spread

The finance ministry8217;s move asking public sector banks PSBs to pause before they jump to raise interest rates has engendered much comment on anti-liberal recidivism. The reality may be more complex. PSBs have atypically high spreads 8212; the difference between interest on deposits and loans 8212; given global banking norms. They often raise lending rates without commensurate increases in deposit rates, which raises their spreads even more. The borrower pays more because of PSBs8217; inefficiencies. Almost 75 per cent of banking in India is in the public sector and there is a clear case for PSBs to address issues of efficiency before they push up lending rates. Plus, banks tend to operate as quasi cartels when it comes to raising rates. There isn8217;t much free market competition.

There are also reasons to question RBI8217;s interest rate policy at least as far as house prices and the real estate market are concerned. As economic theory argues, monetary policy is ineffective when it is used to impact prices already flexible, such as asset prices, including real estate prices. Note that despite the last two RBI moves the real estate 8216;bubble8217; has not burst. The real estate market needs a large number of reforms including those on land use, rent control and estate duties. Liquidity and transparency won8217;t come without these changes and till that comes 8216;rational8217; pricing won8217;t happen. Another reason in support of high interest rates is inflationary expectations. It is time someone pointed out India barely has a decent measure of inflation and not even a half decent measure of inflationary expectation.

All this is not at all to deny the desirability of autonomy for public sector commercial organisations. Or the fact that in this government like in all the previous ones, the concept of PSU managerial autonomy is not universally loved. But when PSB chiefs say their autonomy has been eroded they must be reminded that they were more or less defining that freedom solely via bankers8217; right to talk up interest rates.