Interest rates going up or down?

It is so funny to see politicians and some fund managers say India’s interest rates are very high in real terms (if inflation is 3% and interest rates are 10% reeal rate of interest is 7%). So interest rates should come down. Also if the $ is now at 52 or 53 to a rupee, it is safe to invest in India.

Assuming you can borrow in US at 3% and invest in India at 10% – it is a fantastic spread. RBI cannot allow this, so RBI has to hold interest rates low. However, the biggest borrower (who acts to keep the interest rates low) is a worry – government borrowing is likely to be quite high.

There is a feeling that industry which is worried about the slowdown is wary of borrowing and there is no great demand for money (again downward pressure). However industry may be wanting banks to lend to its end customers (auto and real estate in particular).

However Tata Motors, Indian Hotels, Tech Mahindra are all borrowing from the retail and institutional lenders at 10.5% + admin costs = say 11% p.a.

where do YOU think interest rates will settle?

My guess is as good as yours!

Related Articles:

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

One Response to “Interest rates going up or down?”

  1. Indian interest rates is not governed by classical economics. There are good Borrowers and bad ones. Because of default rates and our court mechanism to recover defaults spread between Gilt yield and Bank lending rates has been very high 6 to 10 percent. Therefore banks prefer to lend to good boroowers at 11-13% and at 16-20% for risky ones. However Govt has been presurising Banks to lend housing loans at 8 percent.

    So banks do some Housing loans but do not want to build a big book at those rates! Good borrowers do not want money except those who have overextended by large aquisitions. Tata Steel, Tata Motors, Tech Mahindra etc. So we have a strange phenomenon that Banks are flush with money and are increasing buying gilts and yields are coming down below 7%( Income funds doing better in last 10 days). Banks are not keen to lend to Companies who have overextended for aquisitions or for NBFCs. So such companies are borrowing from public at 11%.

    I watched today that Debeture floated by Tech Mahindra (to Pay for Satyam) is being mostly subscribed by Mutual Funds- Obviously Income funds. If this trend continues it may move money from Banks to Mutual funds and bank interest may move up. To summarise, answer to your question – interest rates of banks will stay here or show marginal reduction until inflation starts moving up. Govt Expenditure on cap account is not likey until Oct – Formation of new Govt, presenting regular budget, allocation of resources etc. Infaltion will remain low until then and so will be interest rates in General. However Adventerous companies will have to Borrow for their adventures and those will be at higher rates. Individuals have to either stay with banks at low interest or deposit with cos in the form of Deposits or Debentures at a slightly higher risk.

Leave a Reply

This blog is kept spam free by WP-SpamFree.