Date:12/03/2005 URL: http://www.thehindubusinessline.com/2005/03/12/stories/2005031201860600.htm

Back Higher borrowings may put pressure on interest rates, says Purwar

Our Bureau

Mumbai , March 11

THE recent rise in US bond yields coupled with a higher than expected government borrowing in fiscal 2005-06 is likely to put some pressure on domestic interest rates, according to Mr A.K. Purwar, Chairman, State Bank of India.

"While the factors that affect the direction of the future interest rates are evenly poised, the world oil prices are closer to their historic highs and any further rise can trigger another spike in the inflation rate," he said speaking at the sixth annual FIMMDA-PDAI annual conference here today.

"Barring a sharp rise in world oil prices, we should see stable interest rates in the near term. The key factor to look out for would be the inflation rate," he said.

Globally liquidity tightening being enforced by rise in the US Fed rate poses a threat to Indian interest rates as well. The situation gets amplified as the demand for investment rises in India. On an average in five major banks in India, around 30 per cent of the assets are invested in government securities, whose values get affected by the movement in interest rates, he said.

Indian yields are still higher in relation to comparable economies in the region, he said.

"While the Government and the RBI take adequate measures to make credit available at market determined rates for the development of the Indian economy, a major challenge that faces Indian banks is a rising interest rate scenario. The pointers to the direction of future interest rates appear to be a mixed bag," he said.

On the positive side, he pointed out, that inflation rates are falling, and liquidity is comfortable despite the strong credit offtake.