Mumbai, Mar 19: The interest rates for the first half of the next fiscal (April-September, 1998) are likely to move up by about 100 basis points on an average. According to the interest-rate scenario outlined by I-Sec's debt market expert Ashish Pithale, the yield on the bench-mark, 10-year government paper is will move up by 90 basis points.Pithale was making a presentation on `The emerging interest-rate scenario' at the Indian Merchants' Chamber on Wednesday. Under the second scenario, the yield on the bench-mark, 10-year government securities may move up by 20 basis points. Under the third, the yield may move down by 30 basis points. The main assumption behind the expectation of an upward movement in the interest rates is the likely decline in the forex reserves from the current levels on account of high forward commitments of $3.19 billion. This is despite accounting for an expected one per cent cut in the bank rate as well as a one per cent rollback on the CRR.
Another major factor impacting on thelikely upward movement of the interest rates is the large borrowing programme of the government for the next fiscal, which is estimated at about Rs 70,000 crore. But the major factor deciding on the interest-rate scenario is seen as the forex inflow, which affects the net liquidity in the system.
According to Pithale, though the deposit growth is expected to remain strong, credit off-take could improve further in the first half of 1998-99. This will further squeeze the liquidity. The interest rate is, however, likely to move down slightly in the second half by about 50 basis points. Under the most likely scenario, the yield on the bench-mark, 10-year government paper will fall by about 30 basis points.
The other scenarios for the second half depict either a 10 basis points rise on the yield or a hundred basis points scaling down on the rates. The major parameter on which the prediction for the second half rests is the expected increase in the forex reserves as sentiments towards Asia improve and currencystability is maintained. The other parameters on which the interest rate assumptions rest are a stable deposit growth rate with a continuing rise in the credit off-take, further reduction in the bank rate and CRR and a resultant reduction in the PLR rates of banks.
However, the large government borrowings will see a spillover to the second half unlike in 1997-98 because the Reserve Bank of India may not be able to mobilise the full Rs 70-75,000 crore from the market in the first half itself.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
