Interest Rise Could Mean More Bonds

The current easy money scenario is likely to give way to higher cost of borrowing and interest rates are expected to move up by October. This, say market circles, would happen as a fall-out of a price hike in petroleum products.

Says a market analyst from a leading foreign brokerage: The price hike in petroleum products is an absolute necessity on the part of the government exchequer. However, a price hike will definitely give rise to inflation rates.

Elaborating on this subject, A K Basu, CEO, IDBI AMC added: Costlier fuel will translate into an increase in transportation charges, which in turn will effect the prices of foodgrains and all other essential commodities.

 

Market circles say that the inflation rate is expected to rise by at least one percentage point on account of a price increase in petroleum products.

While the current inflation rate is around six per cent, a price hike in petroleum products will push up the rate to seven per cent, said a fund manager from a leading private sector mutual fund.

A higher inflation rate would automatically result in higher cost of borrowing or higher interest rates.

Market circles expect that the interest rates will hover around the 16 per cent level around October, from the current 14.5 per cent.

Steep interest rates would also mean that the primary markets would continue to witness a deluge of bond issues, offered by institutions and also private sector companies.

The announcements made during the last credit policy had raised market expectations that the equity cult is going to revive because of falling interest rates. However, if there is a hike in the rates, equities would continue to witness a lacklustre trend, said a source from a city-based brokerage.

There are also fears in the market that India may get into a debt trap if debt offerings exceed equities by a large margin. Also, the debt-equity ratios of corporates may be hampered because of this, commented another analyst. The main worry of market circles, however, lies in the fact that higher cost of borrowing could stall the expansion projects of corporate houses.

Many of the corporates had shelved their expansion plans during 1995-96, and high interest rates could see a repeatation of the trend, a market analyst added.

Sources from a leading financial institution, however, played down the prospect of a rise in interest rates.

A hike in interest rates is not expected in another six months, and that too would be opposed by the government, he said.

High cost of borrowing would only increase the interest burden on the government which has been borrowing heavily from the markets, he explained. The government should try to find ways and means to reduce costs and increase savings, he added.