Interest rates may climb up after Dec

Interest rates may climb up after Dec
The Hindu Business Line, August 4, 2009, Page 6

Vidya Bala
M.V.S. Santosh Kumar

Interest rates may head up after December on the back of higher credit offtake, the Government's borrowing programme, infrastructure spending, and the consequent private participation, according to Mr Y. M. Deosthalee, Chief Financial Officer of Larsen & Toubro.

Inflationary pressure, as a result of inflow of funds from overseas debt and equity investors, may also fuel an interest rate rise .

"If inflows continue, there will be a pressure on the RBI to buy dollars. If that happens, they would have to release rupees, leading to inflationary pressure, resulting in interest rate increase. All indicators are towards an increase in interest rates," he said in an exclusive interview with Business Line.

It may be noted that the RBI recently raised its Wholesale Price Index (WPI) forecast for end-March 2010 to five per cent from four per cent earlier, stating that global commodity prices have rebounded faster than the global economy.

NCD ISSUE

The expectation of rising rates could be one reason why L&T Finance, a whollyowned subsidiary of L&T, has lined up a Rs 500-crore (with an option to retain another Rs 500 crore of over-subscription) non-convertible debenture (NCD) issue later this month.

The interest rate of the NCDs, which are to be listed on the NSE, would be disclosed a few days before the issue.

According to Mr Deosthalee, also the Chairman of L&T Finance, the company is tapping the NCD route to diversify its funding sources from wholesale debt market to retail market as well. The issue would also provide the company with funds for a longer tenor of 5-10 years. NBFCs are mostly dependent on wholesale market - mutual funds and banks for their funding; these carry tenor of 3-5 years.

Wholesale debt market

Mr Deosthalee said stated that the wholesale debt market in India the country lacks depth, as a mature debt market should have debt with different maturity profiles.

"The market currently lacks sufficient debt (issuances) with long tenor. This can be overcome if there are pension and retirement benefit-related reforms, as these are long term liabilities with an objective of long term asset creation" he said.

Infrastructure projects such as power fit into this slot, as there are currently very few lenders given the long-term nature of the projects. Such long term issuances, according to Mr Deosthalee need more participants (investors) willing to accept all kinds of debt (government and corporate) with different maturity profiles.

The other important pre-requisite for a good debt market is the removal of aberrations arising from partly-administered interest rates.

"The interest rates given by the Government on post-office deposits or the public provident fund are administered and compel banks to keep interest rates high. These aberrations need to go to have a smooth yield curve that is market determined," Mr Deosthalee said.