MUMBAI, Nov 4 : The spurt in demand for rupee funds should lead to a mild rise in Indian interest rates in the last quarter of 1997/98 (April-March), ICICI Securities and Finance Company (I-Sec) said on Tuesday.

``While revival in industrial demand and an increase in credit pick up from banks seems to be round the corner, one cannot expect interest rates to maintain their secular downtrend,'' I-Sec said in its latest Debt Market Update.

``In the emerging scenario, we are likely to see a decline in interest rates till about December/January,'' I-Sec said.``We may see the 10-year (13.05 percent 2007 stock) at 10.50 per cent yield.''

Subsequently, a combination of factors would see demand for rupee funds exceed supply and hence some hardening of interest rates in the last quarter of the financial year, it said.

``However, interest rates are unlikely to increase sharply, a 50-75 basis point upward move for various maturities over December/January levels look likely,'' the paper said.

With declining interest rates following the Reserve Bank of India's October 21 monetary policy, the chances of revival of industrial and corporate demand for credit should pick up, I-Sec said. ``Secondly, the sharp widening spreads on Indian Yankee bonds to about 350 to 400 basis points from an issuance spread of 160-170 will force domestic corporates to evaluate the option of raising rupee resources,'' the paper said.

These two factors would lead to a significantly higher demand for rupee funds in the second half of 1997/98, it said. Also the RBI so far completed close to 95 per cent of the budgeted borrowings of the current fiscal.

The balance gross borrowings of Rs 3,184.83 crore can be easily completed through the 364 day treasury bill route at an average of Rs 290 crore over the remaining 11 auctions, the update said. Thus, chances of another security auction this year appear to be slim. However market expects an inflation indexed bond or 10 year security (for setting an year-end benchmark) being issued for a small amount. Despite this, the supply of government stock could be fairly high through the OMO window.

With government likely to overshot the fiscal deficit target, additional borrowings will be required to fund the gap. Rather than meeting the deficit by resorting to additional market borrowings, the government might prefer to privately place the securities with the RBI (the provision of Rs 16,000 crore for monetised deficit provides sufficient cushion). In turn RBI could become more aggressive on open market sales of securities in its portfolio and dilute the inflationary impact of deficit monetisation.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.