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Interest rates should be linked to inflation: Sinha

Finance Minister Yashwant Sinha said on Friday that it was important to link interest rate with inflation rate to bring down the real interest rate now at a decade's high of 7.3 per cent.

"Today inflation rate is only one per cent but the real interest rate was highest in this decade. So, it is important to link interest rate and inflation rate," Sinha said on the sidelines of a Federation of Indian Chambers of Commerce and Industry seminar on Budget in New Delhi.

Sinha came under criticism from a section of population for reducing small savings rate further by 0.5 per cent in the Budget to maintain a soft interest regime in the economy.

"People here should not mind the slight (0.5 per cent) cut in interest rate on small savings. If interest rate on deposits have come down, people would also benefit from lower lending rates when they take loans for various needs including housing loans," Sinha said.

Real interest rate in India was at present 7.3 per cent as against a meagre 2.4 per cent in 1994-95.

The Economic Survey for 2001-02 had pointed out that the fall in inflation rate was faster than the fall in interest rates, which kept real interest rate higher.

Sinha said linking of interest rates to inflation rate was a worldwide phenomenon. In the US, for instance, the interest rates were slashed 9-10 times in the last few months to spur demand in that country.

He also said it was necessary to link administered interest rates on small savings with the market rate.

The government linked rates on contractual savings with the average annual yields on government securities, as recommended by the Y V Reddy committee.


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