Brief Notes ont he Structure of Interest Rates in India

Each of the various maturities of financial assets in the money and capital markets of the country has its own interest rate.

The varying interest rates in India in the organised financial system are determined by two forces:

(i) The RBI’s policy, and

(ii) The interaction between the demand for and supply of investible funds.

Basically, the interest rate structure of the organised financial sector is determined and governed by the RBI.

The activities of the unorganised sector being outside the purview of RBI’s control, there is lack of orderly arrangement in the interest rate structure in this sector and, hence sometimes, usurious rates are charged.

The Reserve Bank’s policy operations can affect the structure of interest rates as follows:

1. By changing the Treasury Bill Rate.

2. By changing the Bank Rate.

3. By fixing the minimum and maximum lending rates of banks.

4. By fixing the maximum interest on time deposits with the Bank.

5. By affecting call money rates through changes in the reserve requirement ratios.

6. By influencing yields on government securities through open market operations sales and purchase activities.

Indeed, the relative mobilisation and channelisation of saving and investment are greatly affected by interest rates. Interest rates can positively affect the growth rate in an economy in the following ways:

(i) By discouraging the flow of credit in unproductive and uneconomical uses.

(ii) By curbing unnecessary consumption expenditure on ostentatious articles.

(iii) By attracting savings into banks in the form of deposits and thereby increasing banks’ capacity to expand credit as per the growing needs of the economy.

(iv) By attracting the flow of funds into government treasury through public borrowings and making it is possible to have increased public spending for development purposes.