Date:15/04/2003 URL: http://www.thehindu.com/2003/04/15/stories/2003041504371200.htm

National

Hike in interest rates on deposits unlikely

By Alok Mukherjee

NEW DELHI APRIL 14. There is more bad news for those depending on interest income these days. With inflation rising to 6.24 per cent by March-end, the returns on most ``safe'' investments made in the form of bank deposits have turned negative as the inflation rate is now higher than the returns offered by banks.

While bank deposit rates depend on their lock-in periods, economists are more likely to choose the return on Government securities as the benchmark for calculating returns. As of now, a 10-year Government security fetches a return of six per cent annually, which means that returns on such investments have already turned 0.24 per cent negative.

According to economists, the high inflation rate phenomenon will depend much on how soon the chaos and anarchy in Iraq is brought under control. With the war practically over, stability in that country would be vital for world market sentiments to settle down and bring down international oil prices, one of the major factors fuelling inflation.

In the Indian context, inflation in the manufacturing sector has gone up from 4.2 per cent to 4.5 per cent and is likely to maintain the rising trend. However, more aggressive has been the inflation in fuel and food prices, which, in turn, have pushed up the overall inflation rate. There is the possibility that both these factors would be reversed, subject to certain conditions.

In the case of fuel prices, once the situation in Iraq calms down, international oil prices are likely to go down and settle at reasonable levels. Already, there are indications of international oil prices coming down and this could find a reflection in domestic prices when oil companies go in for their fortnightly price revisions.

In the case of food, however, there has been a spurt since February this year and economists attribute this to two factors — the increase in the minimum-support price and the nervousness about the next monsoon. Thus, the trend of high food prices is likely to continue till the monsoon picture becomes clear.

Though the returns on bank deposits are turning negative or getting squeezed, economists do not see the possibility of any increase in the bank-deposit rates in the near future since that would mean increase in the lending rates also. ``It is easy to lower interest rates since basically individuals take the hit. But it is difficult to raise interest rates because banks, mutual finds, the Government and industry take a hit. These being powerful entities, there is little possibility of interest rates being hiked,'' an economist with a leading credit rating agency told The Hindu. ``The official explanation could be that the rising inflation is a passing phenomenon, that inflation will come down and, therefore, there is no need to hike interest (and deposit) rates,'' he added.

Even if inflation comes down, the expectation among economists is that the average level would hover around five per cent plus. ``Interest incomes, therefore, will continue to be squeezed,'' they added.