"The net cumulative borrowings of central and state governments is conservatively estimated at Rs 86,000 crore for the year 1999-2000, a 10 per cent increase over last year levels," the report said adding that with the government borrowing crowding out industrial credit, any improvement in the industrial activity will push up the interest rates, since the amount of funds available to this sector will roughly be the same as last year.

"Inaddition to this, large fund mobilisations by mutual funds could force a shift from time deposits to demand deposits which, coupled with a low expected growth rate in bank deposits could reduce the lendable resources of the banks and put an upward pressure on interest rates," the report said adding that the decline expected in capital inflows in 1999-2000 and the recent hike in crude prices will increase the overall import bill and strain the balance of payments situation, again pushing up the rates.

"The high government borrowings and a steady supply of bonds is also expected to push down yields in the first quarter of 1999-2000," the JP Morgan report said adding that with the RBI keen on extending the maturity profile of government bond yield curve, it is likely to float more longer term bonds (more than seven years), while fresh issuances of short and medium maturities will be kept at the minimum.

"Liquidity will, however, be easier in the first quarter on the back of large government spending,redemption proceeds of the 12 per cent 1999 stock and further lowering of the CRR for banks," the report said adding, " the liquidity may be sucked out from the system because of fresh bond issuances."