Is The Honeymoon In The Debt Market Over?
End of the debt wish
R K Nair
Managing director, Corpbank Securities Ltd
Real interest rates in India are high and there is scope for a further fall in them. The yield on the 10-year government paper had fallen from 7.29 per cent in March 2002 to 5.82 in January this year.
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It has risen again to above 6.50 per cent now. This spike is an aberration as gilts and gold are safe havens during war times. We are seeing this flight to safety in the US, the UK, Euroland and Japan, where yields on government bonds and treasury bills have fallen following the uncertainties over Iraq.
A quick correction of this unwarranted rise in yield and fall in prices is expected soon. The interest rates will continue to be soft with the monetary authority reiterating its bias to that effect.
The overall Indian macroeconomic picture is one of comfort and tranquility as interest rates are declining, inflation is low, liquidity is sufficient and foreign exchange reserves are at an all-time high.
However, the real sector growth has been projected at 4.40 per cent for 2002-03 by the Central Statistical Organisation against a targeted growth of 5.50 per cent as new investment activity and credit flow to industrial sector are subdued.
Interest rates in India have been showing a secular decline in line with global interest rates in developed economies. The US Federal Reserve left interest rate unchanged at 1.25 per cent at its policy meeting on January 28.
Many economists believe that it will cut interest rates at its next meeting to prevent the US economy from dipping into recession and prolonged sub-optimal growth, which would push up unemployment and cause inflation to fall further. In fact, the risk of deflation is real.
The Bank of England decision on February 6 to cut interest rates by a quarter point to 3.75 per cent has brought it down to its lowest level in 50 years as the outlook for growth has darkened.
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