The world environment is showing hardening of interest rates. While Indian scenario is not the same as other developed countries and as economies are integrating, it cannot de-link itself from international developments. It remains to be seen when the interest rates will start moving upward.
Federal Reserve Board has recently indicated that interest rates may go up by 25 basis points and it is expected to take a further surge by 2% in the next six to nine months and by 3% in 2005. Other developed countries like Britain, New Zealand and Australia have already tightened the rates. Their interest rates are among the highest in the G-8 countries.
India Inc. has experienced a fall in interest rates in the last five years. The major contributors to this trend were continued foreign inflow of funds, sound economic fundamentals and colossal liquidity in the market. But as the financial system is integrating with the world market, it will be difficult for the RBI to stay detached from the international developments.
Looking at the Indian scenario, it seems that interest rates will be stable for a few more months and thereafter, it will take an upward trend i.e., soft interest rate environment will come to an end. There are number of reasons for this to happen. First, RBI in its latest monetary policy has indicated that soft rate environment is going to end and the next move may be increasing the interest rates. The finance minister in his recent trip to Mumbai has indicated to the RBI governor "not to raise domestic rates till the international rates come close to the Indian level". This is because short-term interest rates are already at a higher level in India. Yield between one-year and ten-year bonds is only 1% whereas it is more than 2% in other countries. |
