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I-Sec bullish on interest rates

Our Bureau

CHENNAI, Jan. 18

I-SEC is bullish on interest rates till the end of this fiscal. It expects the current yields to sustain, with the possibility of a further easing if the EPF rates and/or bank rate are lowered. In its debt markets update, I-Sec points out that interest r ates have declined significantly in the last three months.

Compared to the levels seen in mid-October, the yield curve has shifted down by about 50 basis points. The 10-year yields have shifted down by about 90 basis points since the beginning of this fiscal. The market has been volatile during the last couple o f months, with the price rise characterised by a sharp rally followed by a partial downward correction.

The market rose sharply again over the last couple of days of the last fortnight, following the announcement of a reduction in the interest rates of public provident fund and postal savings schemes.

I-Sec feels that banking system liquidity is balanced till the end of this fiscal. It assumes that there will be further Government borrowings of about Rs. 10,000 crores (beyond the current level of Rs. 5,000 crores slippage). Inflows through redemptions and coupons are at about Rs. 15,700 crores till the end of the year, leading to a net inflow of about Rs. 5,000 crores.

As for the banking system's real sector flows, I-Sec points out that deposits and credit growth have been balanced (see graph) this year. (Incremental credit-deposit growth to date has varied between 84 per cent and 121 per cent for various base dates fr om July 30).

I-Sec believes that the incremental C-D ratio during the last quarter of the fiscal would be about 100 per cent. It also notes that the ratio has rarely exceeded 88 per cent in the last quarter of the last five years.

The other major flows are the rollback of Y2K measures at the end of January (Rs. 4,500 crores outflow) and FII flows. Again, assuming that there would be no net portfolio outflow, liquidity appears balanced, the report said. If the liquidity tightens sh arply, RBI could reduce the CRR, which is in line with its objective of moving towards a CRR of 3 per cent.

The report points out that inflation has been benign during this fiscal, due mainly to the high base of last year. With the base effect tapering off, inflation is likely to creep up in the next few months, though WPI inflation may still be below 5 per ce nt till the end of the fiscal.

The rupee has been stable, trading between 43.25/$ and 43.60/$ in the second half of the calendar year. The forward premia up to one year have declined below 3.5 per cent, indicating market comfort with the current exchange rates.

The foreign currency reserves are at an all-time high, providing comfort against any sharp depreciation. Hence, there does not appear to be any concern on the inflation or exchange rate fronts impacting interest rates.