Pressure on interest rates likely in second half: Economists

Pressure on interest rates likely in second half: Economists
The Hindu Business Line, August 8, 2009, Page 6

Vinson Kurian, Thiruvananthapuram

The question now is when the lending rates would rise, and not whether. This is the view of the economists who took part in a random Business Line opinion poll.

Dr Dharmakirti Joshi, Director and Principal Economist at rating agency Crisil, said the sufficient liquidity in the system and low demand for funds suggest that there would be no immediate pressure on borrowing costs.

To prevent interest rates from going up in future, the Reserve Bank of India would have to keep accommodating the Government’s borrowing programme. But as growth picks up in the second half of the year and inflation too inches up, it will have to withdraw liquidity. This is when the borrowing programme will start biting and put pressure on borrowing costs.

UPWARD PRESSURE

Mr Siddhartha Sanyal, Economist at Edelweiss Securities, said that the large Government deficit is a clear upward pressure for interest rates.

Headline PLR may stay unchanged; but actual lending rates will possibly go up by around one per cent by March. Improved availability of equity capital and bank finance is the silver lining. Calibrated liquidity infusion through LAF (liquidity adjustment facility) and OMO (open market operations) within reasonable limits are effective contra-cyclical policy tools across countries under similar circumstances and should not be seen as negative, Mr Sanyal added.

REVERSING POLICY

Mr Indranil Sen Gupta, Economist, Bank of America-Merril Lynch, said that the RBI is most likely to reverse its easy money policy by January/April.

“We have revised our March 2010 WPI inflation forecast to 6.5 per cent (from 6.1 per cent), much higher than the RBI’s five per cent. But we do not expect the RBI – or any other central bank for that matter – to take chances with recovery at this stage.”

Gilts are likely to trade within a range in the near term but eventually weaken. Negatives come from a rising probability of a reversal in accommodative policies and rate hikes. Markets have partly priced in RBI tightening (as well as fiscal pressures).

“We believe that the lending rates have likely bottomed. At the same time, we expect the present soft lending rate regime to persist till second-half of 2010-11.