Rates may rise by up to 50 bps in fourth quarter

Rates may rise by up to 50 bps in fourth quarter
The Economic Times, August 24, 2009, Page 12

PTI NEW DELHI

INTEREST rates are likely to rise in the last quarter of this fiscal by up to 50 basis points as bond yields may go up and RBI may tighten money supply to rein in inflation, which is likely to be fuelled as food prices could move upwards, according to IDBI Gilts.

“...There has not been fundamental change in the economy. Despite that, the yields on the government papers have hardened in the range of 30-55 bps in the last one-and-half months and if this is the trend... then interest rate will rise by 25-50 bps from December to March,” IDBI Gilt managing director & CEO G A Tadas said.

The bond yield may have hardened due to the government’s high borrowing target in the current fiscal.

The government’s borrowing target stands at Rs 4.51 lakh crore for 2009-10, with 66% of the borrowing in the first six months.

Mr Tadas added that in case of failure of agriculture due to drought-like situation in the country food prices would rise, which could lead to inflationary pressures in the coming months.

Agriculture minister Sharad Pawar has described the situation in 246 districts in 10 states as “grim” due to scanty rainfall.

In such a situation, the Reserve Bank of India might tighten its monetary policy and as a result banks will have to respond by raising interest rates, Tadas said. If this happens, this would be reversal of RBI’s soft money supply policy since global financial crisis deepened in the middle of September 2008.

IDBI Gilts is a subsidiary of state-run lender IDBI Bank and it operates in debt markets as a primary dealer.

Earlier, the country’s largest private sector lender, ICICI Bank, had said lending rates will start rising any time now.

“I really believe that interest rates are not going to go down from here. Gradually they would go up. When? ...would really depend on how fast the credit growth takes place”, ICICI Bank CEO and managing director Chanda Kochhar said.

In April, ICICI Bank was the first to cut lending and deposit rates by 50 basis points after announcement of the annual credit policy by he Reserve Bank of India.

However, State Bank of India chairman O P Bhatt said rates would not rise till Diwali and may even soften by 25-50 basis points before the busy season in October. After Diwali, there is great demand of credit due to the bust season.

HDFC chairman Deepak Parekh has also said interest rates are unlikely to decline in the next three to six months due to high government borrowings.