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There are two dimensions to the outlook on interest rate. One, the sovereign and corporate bond yield curves as derived by trading in the secondary market. The other is the interest rate on housing and other consumer loans extended by banks or other institutions. The interest rate on loans is what is experienced by us in our day-to-day life, but this rate more or less follows the sovereign yield curve.
The secondary market yield curve of sovereign or corporate securities is dynamic, subject to change upon each and every trade. Potentially, each trade can take place at a different yield/price which can reset the yield curve. Price determination in the secondary market is a function of liquidity in the system and events in the domestic and global market that shape interest rate expectations. The interest rate on loans granted by banks or other entities is derived from the yield curve in terms of direction, and is shaped by other determinants such as quality of the loan book (NPA level), capital adequacy, reserve requirements, and degree of competition among entities.
Now let us look at the relevant fundamentals of our economy that shape the future outlook. Surplus liquidity in the system is one factor that plays a major role in determining interest rates. System liquidity is abundant now and is expected to remain adequate going forward. Since April 1, 2007, incremental deposits in Scheduled Commercial Banks (SCBs) up to August 17 were Rs. 1,48,878 cr, whereas incremental credit off-take was Rs. 14,852 cr only. Since January 1, incremental deposits in SCBs up to August 17 were Rs. 3,54,745 cr, against which incremental off-take was Rs. 1,71,701 cr. To take a look at the corresponding period of the previous year, incremental deposits over the period April 1-August 18, 2006 were Rs. 1,48,521 cr and incremental credit off-take was Rs. 79,672 cr, i.e., the off-take was significantly higher than in 2007. Over the period, January 1-August 18, 2006, incremental deposits were Rs. 2,98,430 cr against which incremental off-take was Rs. 2,40,048 cr, palpably higher than this year. Going forward, savings are expected to remain buoyant and coupled with the money multiplier effect, will bolster deposit levels in banks. This, in turn, will lead to adequate liquidity in the system. |
