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Economy

Chidambaram Asks Banks To Lower Rates

The Finance Minister, P. Chidambaram, asked banks to reduce interest rates by 0.5% (both lending and deposit rates).

This may signal a change of stance by the government and eventually the RBI, to push credit growth up. Now banks may listen and rates may come down (given the RBI reduces its benchmark rates) – and if this happens, the bank index (BANKNIFTY) may move up substantially.

You can buy the Bank Bees (BANKBEES) which is a simply way to buy the BANKNIFTY, or simply the BANKNIFTY futures. Unfortunately no options trade on that index, otherwise they would be a good buy. The problem isn’t that options are not allowed, but that no one will buy or sell them!

The other sector to track then, is Auto. Car and Two Wheeler manufacturers have been reeling under the pressure of high rates, as even a 0.5% hike can make a vehicle unaffordable. If the rates come down, car loans (which are mostly fixed rate) will likely pick up.

If interest rates reduce, inflation tends to go up, but it seems to be under 4% today. Controllable? Perhaps, but if we have an interest rate reduction and simultaneously a price hike on fuel, inflation may spiral up. Who said life is boring?

Disclosure: I hold Canara Bank.