Finance Ministry bets on stable interest rates, but ground reality is different


Economic Affairs Secretary Subhash Chandra Garg has gone on record saying that interest rates are unlikely to go up. But there are enough reasons for interest rates to move northwards. Here are five reasons that make a strong case for higher interest rates:

  • The deposit growth has been sluggish  in the last one year. It has fallen to single digit.  In March , the largest bank in the country , the State Bank of India (SBI) hiked the deposit rates by 10-15 basis points.  Last month, the largest private bank , HDFC Bank  effected a major hike, up to 100 basis points in deposit rates. Going forward, the deposit rates are going to go up as competition to garner deposits will hot up. This increase in deposit will have an impact on the lending rates as cost of funds will inch up.
  • The inflation has been at an elevated level in the last 9 months. In fact, the RBI pressed the pause button on easing the repo rate in August last year. The CPI or the consumer price index, which the RBI tracks is currently at 4.28 per cent, which is over the targeted level of 4 per cent ( + – 2 per cent ). The projected inflation for 2018-19  is also higher than 4 per cent. The RBI has projected a CPI of 4.7-5.1 per cent for the first half ( April-Sept)  and 4.4 per cent in the second half ( Oct-March)  of 2018-19.
  • There are too many inflation impacting factors that are now  playing out. The crude oil rise has been unabated, which will directly impact the inflation numbers. The recent decision of a hike in MSP,  the staggered implementation of HRA by states, fiscal deficit numbers and also the rupee depreciation, will push up inflation in the coming months. The election season of the election year will also increase the money supply in the economy.
  • The yield in the domestic bond market are on the rise, which clearly indicates that the interest rates will rise in future. The higher inflationary  projection for the coming months is already leading to fall in the bond prices and consequently rise in yields. This gives a clear indication of  higher interest rates in future.
  • The US Federal Reserve is also getting back to normalcy in its monetary policy.  The Fed rates are already rising gradually. Globally, the growth is coming back and the commodity prices are also recovering , which hints that inflation will also move up going forward.businesstoday