Rising inflation to keep interest rate high

MUMBAI, OCT 2: The imminent rise in inflation is likely to keep the interest rates at a high level. A steep rise in inflation resulting f...

MUMBAI, OCT 2: The imminent rise in inflation is likely to keep the interest rates at a high level. A steep rise in inflation resulting from the proposed hike in the prices of petroleum products over the next few months will weaken the argument for a bank rate reduction, said the latest JP Morgan report on India markets outlook for week ended Oct 1.

"Bank rate is more or less tracking inflation. By 2000 real interest rate are likely to be about 3 per cent higher than September 1999 levels," the report said. The RBI normally uses bank rate to signal changes in interest rates. When the central bank wants rate to fall, it reduces the bank rate.

According to the report, it might be difficult for the RBI to reduce bank rate as it serve primarily as a refinance rate for banks and primary dealers. "The current year has seen a large part of the available refinance being drawn down for funding government bonds. Thus government has been financing market participants to buy its bonds and running a `negative carry’of three per cent which could have implications for the monetary policy," it said.

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A hike in petro-products prices is a foregone conclusion. With international oil prices shooting up, India will have no other choice but to increase petrol/diesel prices.

JP Morgan said a lowering of bank rate will only worsen the situation and increase the extent of `negative carry’ for the government. "Though expecting either a bank rate cut or repo rate cut in the October review of monetary policy will be far-fetched, CRR will most likely be reduced," it said. According to the report, despite the forecast increase in the fiscal deficit and government’s market borrowing requirement, the impact on interest rates will be minimal.

It said in the next fortnight is expected to see comfortable liquidity with no significant outflows from the system apart from a possible government bond auction. "Coupon inflows of Rs 2,000 crore over next two weeks should help to keep overnight call rates stable between 8-9 per cent," it said.According to the report easing of call rates in the last two weeks has also eased the gilts yield by 50-75 basis points.

The I-Sec report on debt market update for the fortnight ended September 30 has stated that the liquidity in the debt market is likely to improve during the fortnight.

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"The downside risk in bonds over the next few months appears to be low with comfortable liquidity and reasonable balance of payments position. "The market players should increase the portfolio duration to take advantage of a rally in case of positive announcement in the credit policy," said the I-Sec report.

Forex reserves

MUMBAI: The country’s total foreign exchange reserves declined moderately by $139 million to $32,953 million during the week ended on October 1 compared with to the previous week total of $33,092 million, according to the RBI weekly statistical supplement. Foreign currency assets also declined by $139 million to $30,285 million. Gold and special drawing rights were remained unchanged at$2,659 million and $9 million respectively.