Budget provides flexibility for interest rate: Y V Reddy

The Union Budget for 2002-03 will provide greater flexibility for interest rate regime and help reduce intermediation cost even as the high level of fiscal deficit makes the task of managing the government's borrowing programme complex, Reserve Bank of India Deputy Governor Y V Reddy said on Thursday.

The decision to benchmark administered interest rates to the yields on government securities of similar maturities would provide flexibility for determining the rates, Reddy told newspersons in Mumbai.

Earlier the basis for changes in interest rate was not clear, he said adding, the tax incentive for banks to make provisions for non-performing assets would reduce the intermediation cost.

The banks would have to take into account the risk and returns while formulating interest rates, he said.

On the government's borrowings, he said RBI expects to manage the programme keeping in mind growth and stability without affecting liquidity but "it is a complex task".

Referring to high borrowings crowding out private investment, Reddy said, "it has potential to crowd out but does not necessarily happen if public investment programmes bring in private funds (the crowd in effect)."

Reddy said higher fiscal deficit was not consistent with objective of stable macro economy. The level of fiscal deficit (in per cent terms) was same as has been in the recent years.

At the macro level, the RBI deputy governor said distortion between debt and equity has been removed with the change in onus for paying tax on dividend from the companies and mutual funds to recipients.

"The impact of removal of distortion and structural changes will not be felt immediately but it will improve efficiency of the market," Reddy added.

The banks would have take into account the risk and the return while determining the interest rate, he said.

PTI

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