Overall interest rates may not harden: Montek

Overall interest rates may not harden from current levels as the country’s fiscal deficit is expected to improve in the days ahead, according to Deputy Chairman, Planning Commission, Montek Singh Ahluwalia.

“I cannot comment on short-term rates, but overall interest rates in the economy are unlikely to harden,” Ahluwalia said on the sidelines of the annual general meeting of the Bombay Chambers of Commerce and Industry last night.

The country’s fiscal deficit shot up in 2008-09 and 2009-10 as the government came up with three fiscal stimulus packages to ward off the adverse effects of the global financial crisis. Estimates peg the total value of the stimulus at Rs 1,85,000 crore (three per cent of gross domestic product, or GDP.

This year, the government resumed steps to rein in the fiscal deficit. The huge revenues in the form of fees (over Rs 1,00,00 crore) from 3G and broadband wireless access auctions and proceeds from selling stakes in public sector units are expected to reduce the government’s fiscal burden. The pressure on the market (read interest rates) to fund the defict will be less if revenues grow in 2010-11.

Ahluwalia said inflation was one of the crucial factors driving monetary policy, and it was likely to ease to five-six per cent by end-2010.

“There is too much focus on the short-term rate. If your fiscal deficit goes one way or the other, it does not matter what RBI does to repo rates. The repo rate, a rate at which banks borrow from the central bank, is not a dominant thing in deciding the overall rate structure of the country,” said Singh.

RBI has raised the repo rate twice in the calendar year to manage inflation in the backdrop of a sharp rise in prices of commodities and primary items.

The short-term interest rates are more influenced by availability of extra cash (liquidity) in the system.

The liquidity has come under strain and overnight lending rates have moved up in the recent past as banks have channelised money to telecom companies who are paying hefty amounts as fees for 3G spectrum.

Market participants are sharply divided on whether RBI will hike interest rates owing to the worsening debt crisis in Europe.