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Anirban Nag
Mumbai, July 20: Contrary to corporate expectations of a drop in lending rates following the steep fall in the inflation rate, all short-term interest rate indicators have been pointing to a marginal upward movement since March. The Reserve Bank had effected its last bank rate cut in that month immediately after the presentation of the Union budget.
The yield on the 91-day treasury bill has gone up from 8.77 per cent on April 3 (after a CRR cut came into effect) to 9.32 per cent on July 16. Similarly, the yield on the 364-day treasury bill has risen from 9.97 per cent as on April 7 to 10.32 per cent on June 30. These indicators point to a tightening of liquidity which can be eased through a cut in banks' cash reserve ratio (CRR), currently pegged at 9.5 per cent. Every one percentage point cut in CRR releases over Rs 5,000 crore into the system.
Industry captains have been lobbying hard for a cut in lending rates after inflation fell to a historic 17-year low of 1.83 per cent as on July 3, 1999. But thisdrop has not really seen a parallel in the term money markets. Dealers said that for the fortnight ended July 16, the three-month commercial paper (CP) rate was at 9.85-9.95 per cent, marginally down from the previous level of 9.95-10.10 per cent. In the inter-corporate deposit (ICD) market, rates for three-month deposits have remained stagnant at 11.25-11.75 per cent level.
"The fall in the rate of inflation should not prompt another cut in lending rates by banks as the two-year compounded annual growth rate (CAGR) for inflation is still quite high at 4.97 per cent," a debt analyst at ICICI Securities, MR Madhavan, said. The reason behind the low rate of inflation this year is a higher base in the previous fiscal.
Says SBI Capital Markets analyst Aasish Aggarwal: "Banks are not in a position to cut interest rates as they are yet to lower deposit rates after the round of lending rate cuts in March."
According a report by ICICI-Securities, despite an increase in international oil prices, a large part ofthe increase has not been passed on to consumers. Prices of manufactured products have also remained stagnant as the absence of strong demand growth has prevented producers from hiking the prices of many items.
"After the elections, administered prices could increase again and an economic recovery would also put upward pressures on the inflation rate. Many banks have cut their prime lending rates (PLR) by 100 basis points in March 1999 following the bank rate cut but average deposit rates have not reduced by a corresponding level, resulting in a sqeeze on spreads. Under these circumstances, banks would find it difficult to reduce PLR further," the report said.
Anlaysts argue that since inflation is computed on a year-on-year (YoY) basis, the wholesale price index (WPI)-based inflation will continue to fall over the next few months. Prices of fuel group items, which are still largely administered, are unlikely to be hiked ahead of general elections. With the trend in primary articles and manufacturedproducts likely to continue, the WPI inflation rate could drop to one per cent, but one has to keep in mind the two-year CAGR which would be about 5 per cent.
With inflation expectations in the range of five to seven per cent after the elections, the real rate of interest is expected to be unchanged at around six per cent, thus indicating that real interest rates have not increased, analysts point out.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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