"Combined with large size government borrowings programme of Rs 1,17,000crore in the current fiscal putting pressure on liquidity and expectation ofrise in inflation and volatility in forex markets could lead to higherinterest rates," I-Sec said in its latest fortnightly debt markets update.Inflation is another major factor driving interest rates,it said referringto the falling inflation rate last year that led to lowering of interestrates.

It said liquidity would be tight through the year even after a cut in cashreserve ratio (CRR) by another one per cent.

RBI, early this year, had reduced bank rate by 100 basis points to seven percent from eight per cent and CRR by one per cent to eight from nine.

Expecting these kind of scenarios, I-Sec expects the 10-year rate ongovernment securities to move towards 10.75-11 per cent during the course ofyear from the current level of 10.27 per cent, a rise of 73 basis points.

The credit-deposit ratio of banks stood at 63 per cent , which wassignificantly higher than the 34-46 per cent range in the last three years,I-Sec report said, adding the credit-deposit ratio was 73 per cent ifcommercial banks' investments in commercial papers (CP), bonds anddebentures are taken into account.

The I-Sec report also hinted at a higher credit offtake this year in thewake of economic recovery as indicated by the Index of IndustrialProduction (IIP) growth of 7.9 per cent in the first 11 months of 1999-2000,that led to credit growth at 21.9 per cent outpacing deposit growth of 17.9per cent.

It said that inflation rates now appears to have bottomed out and is likelyto stabilise between 4-4.5 per cent during the next few months, but couldmove to near six per cent in the latter part of fiscal year.

Though we do not foresee a sharp increase in the next couple of months,inflation in the second half of 2000-01 would be critically dependent onmonsoon rains and crop output, it said, adding prices in manufacturingsector may creep up if economic growth sustains and demand picks up.

About foreign exchange market, the report said the country's foreigncurrency reserves which grew by $5.5 billion (around Rs 27,512 crore) lastyear led to a spurt in liquidity.

Foreign currency reserves in the last nine months was to the tune of 4.5billion dollars.

"If the inflows slow down, there could be further pressure on liquidity," itsaid. I-Sec said that though foreign exchange inflows have been strong andanother additional Rs 3,600 crore is due to cash reserve ratio cut, thisdoes not explain the extent of liquidity.