The Hindu : Interest rates likely to drop further

Online edition of India's National Newspaper
Wednesday, Aug 06, 2003

Business

Business

Interest rates likely to drop further

By Oommen A. Ninan

MUMBAI AUG. 5. While there is speculation about the movement in interest rates in the near future, there is agreement that interest rates are likely to only go lower. While some expect it to drop by 50 basis points, others say the drop will be in the range of 25 to 30 basis points. On a cheerful note, though, any cut in interest rates is likely to help retail investors.

"We expect interest rates to decline further, by about 25 to 30 basis points at the short end and about 10 to 15 basis points at the long end," said Abheek Barua, Senior Economist, Crisil. According to Mr. Barua, this is based on three factors. One, commercial credit demand is tapering off despite the continuing recovery in industry. Two, inflationary pressures are moderating largely because the base effect (of extremely low inflation rates last fiscal) is disappearing. Finally, "we expect a cut in the repo rate of 25 basis points that is likely to act as a trigger".

"Robust inflow of foreign exchange, poor credit pickup in industry, low inflation rates along with Reserve Bank's strong bias towards low interest rates will be resulted in the fall of interest rates by 50 basis points in six to nine months," said Bobby Surendranath, Senior Fund Manager, Aviva Life Insurance. He too expects another 25 basis point cut in the repo rate by October. The last repo rate cut by 25 basis points brought it to 5 per cent which signals the low interest rate bias of the central back.

"This is likely to help retail investors," Mr. Barua argues. The decline in interest rates is likely to benefit all segments of the economy. With a paucity of commercial demand, banks will aggressively lend to the retail sector and this would translate into a cut in interest rates in both housing and consumption loan charges. A lower yield curve would enable medium to large corporates to access funds at lower costs. (For smaller, higher risk companies that is not necessarily true). Higher liquidity will support the rally in stock markets and lead to further improvement of bond funds.

Although the system is awash with liquidity, on the demand side corporate credit offtake is not taking place. This would pressurise the banking system to lend more to the retail segment. Further, external factors such as continuous fall in interest rates in developed countries such as the U.S. and in Europe would force India to cut rates to keep Indian products competitive in export market, said Mr. Surendranath.

However, the key factor is that in the last two months, the interest rates in the U.S. again started moving up as there is an expectation that the economy is reviving. Said the Aviva analyst, "We do not think that the recovery in the interest rates in the U.S. markets is sustainable. So that rates will again come down in India. We believe the U.S. economy still having a considerable retail and corporate debt which would need to be brought to more realistic level before the economy there revives".

At present, inflation is hovering in a comfortable range of 3 to 5 per cent and as inflation is not going up, the Reserve Bank may not be averse to reducing the interest rates.

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