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Rates to stay under pressure: I-Sec

Our Bureau

CHENNAI, July 3

SHARP credit growth, a high Government borrowing programme and slowdown in deposits make for a potent combination and could result in sustained pressure on interest rates this fiscal, according to the debt market update from ICICI Securities (I-Sec).

It said the way out could be through monetary expansion _ a combination of monetisation and CRR reductions _ around the time of the mid-term review of the monetary policy in October.

The report said non-food credit demand has grown by Rs. 2,263 crores in the last fortnight, the first time it has been positive this fiscal. Explained as the usual seasonal behaviour, credit demand is expected to grow from now, with a sharp increase from October. This is also indicated by the data on industrial production and a sharp upturn in trade.

The report said deposits had declined by about Rs. 2,300 crores in the fiscal-to-date, which is again attributed to the usual behaviour at year-end. It draws attention to the deposit growth in the week ending March 31, 2000, which was Rs. 31,902 crores ( 25 per cent of the full fiscal). It says that this includes a large element of window-dressing, the reversal of which may account for the subsequent decline.

The report warns that unless deposit growth picks up in the next few months, there could be a credit crunch in the second-half.

According to the report, SLR investments by banks have exhibited high volatility. The latest figures show that investments by banks in SLR securities had dropped by Rs. 3,500 crores in the reporting fortnight ending June 16. Last year, investments grew s teadily except for a couple of occasions in December 1999 and January 2000. The fluctuation in SLR investments has been attributed to the large amounts in repos with RBI on reporting Fridays.

The report termed the 1 per cent reduction in the EPF rate to 11 per cent from 12 per cent as the first positive news in a long time. Though the cut had no direct impact on rates of Government securities, it had improved sentiment. Consequently, yields h ad eased by about 3 to 5 basis points.

I-Sec expects prices to be firm till the next auction announcement (expected this week. It continues to recommend a defensive portfolio concentrated in the one- to three-year segment, with some exposure to the seven-year segment. I-Sec expects call money rates to range between 7.5 and 10 per cent this fortnight.