ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Correcting Interest Rate Distortions

While the monetary authorities have sought to correct the distortions in the yield rates on government debt, they have not addressed the question of high interest rates on commercial sector bonds for which the FIs and PSUs have been mainly responsible. The situation calls for policy initiatives by the RBI.

Neglect of Bank Credit for Industrial Revival

Key Developments in Financial Markets THE operations of the Indian financial markets have undergone some significant changes in the recent period which have implications for the long-term growth of the real economy. These changes have spawned one of the most serious dichotomous situations in which the financial system has been nursing a surfeit of liquidity but the productive enterprises have been facing an acute shortage of funds now for the third year in succession. Foremost among the financial sector changes has been the ballooning of marketable debt instruments issued by the public financial institutions (FIs) and public sector undertakings (PSUs) at unreasonably high rates of interest. So long as this situation is not corrected and a degree of reasonableness restored to their interest rate structure, there is no hope for the manufacturing firms to acquire the required amount of liquidity from the banking system nor is there any hope for them to see equity market getting revived, Some of the large-size manufacturing firms may partake the benefits of the growth of debt instruments to acquire bank funds, but if the world of manufacturing activity is to inn its full circle with reasonable matching of demand and supply for goods, the credit requirements of the mass of small and medium enterprises, which constitute the backbone of our economy and which generally remain outside the purview of marketable debt instruments, have to be met. Field reports suggest that it is not being done, and whenever is - offered, is at unreasonably high rates of interest, particularly in relation to the current recessionary conditions, it is time that the issues arising out of (i) the issuance of costly debt instruments by FIs and PSUs, and (ii) the general neglect of bank credit as well as micro credit as an instrument of development, are given due attention, without which the revival of the industrial economy will remain a pipedream.

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