ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Case for Government Direction on Interest Rates

Interest rate deregulation has led to skyrocketing costs of borrowing for informal sector borrowers and also a relative decline in credit delivery. There is evidence that it is the informal sector which bears a higher cost of borrowing as a result of positive discrimination in favour of corporates. There is also corroborative evidence that banks charge rates of interest far beyond their PLRs for rural households. All this is a clear case of market distortions and failure in achieving appropriate allocation of institutional credit. This can be corrected only by the application of the public interest theory of regulation in which calibrated central bank interventions can allow freedom to banks, but within an accepted industry discipline. The finance ministry's concern about the possible increases in the interest burden on the informal sector is to be appreciated in that light.

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