Expect 50 bps increase in lending rates

Updated: Dec 31 2006, 07:25am hrs
As the US economy is slowing down and there is very distant hope for recovery, the foreign funds are flowing to emerging economies like India for better return of their assets.

Besides this, a large amount of FDI money is expected to float in the Indian market next year. Considering these factors the liquidity in the Indian market is expected to be high.

Higher liquidity could further fuel into the inflationary pressure in the country. Inflation is also a result of growth in GDP, which requires more consumption to fuel the growing economy. The rise in consumption and demand for the various products allows producers to inflate prices and pass on to the consumers.

Considering the higher liquidity and rising inflation, we expect another 50 basis points increase in the lending rates.

RBI could further attain it through hike in CRR and repo rates by another 50 basis points in the next year 2007.

Although, we still see a sustainable growth in the Indian economy over a long period of time the Indian economy can grow at about 7.5-8.5% over the next few years, which is primarily a result of availability of capital, growing industrial output, favourable demography and growing exports. Further acceleration in economy would also benefit sectors like infrastructure and consumer driven sectors, which could include FMCG, consumer durable and auto sectors.

The author is chief economist, ABN Amro Bank