Situation primed for a rate rise

ECONOMIC SURVEY 2003-04/ INFLATION AND INTEREST RATES

Interest rates, which are ruling at three-decade lows, may rise on the back of a stubbornly high fiscal deficit and rising demand for loans from industry, Economic Survey said.

The survey, a report card of the Indian economy "" released on the eve of the Union Budget "" called for sustaining the average annual growth of 7-8 per cent in the next five years, containing inflation to single digits and fiscal consolidation to slash the deficit.

"With the fiscal deficit remaining high and signs of a pick up in the flow of credit to the commercial sector, the possibility of interest rates moving northwards cannot be ruled out," the survey pointed out.

At the same time, the survey said the impact of low interest rates on government debt was yet to be felt and fiscal consolidation along with low interest rates was needed to attain higher growth.

It also warned that firm prices of crude oil, non-oil commodities and capital inflows could affect monetary conditions this financial year.

The annual economic survey, however, made no mention of administered interest rates on small savings schemes. The government has pared the administered rates by over 3 percentage points since 2001.

Simultaneously, the Reserve Bank of India (RBI) has been cutting rates in the banking system. The objective was to realign the entire interest rate architecture.

The last Budget had cut rates on government-administered small savings schemes by 1 percentage points. Within hours of presentation of the Budget, the RBI cut the repurchase rate as well as the savings bank deposit rate by half a percentage points each.

The repo rate is now pegged at 4.5 per cent, savings bank rate 3.5 per cent and the bench-mark bank rate 6 per cent. The small savings schemes of the central government now offer returns up to 9.5 per cent.

In contrast, the return on government securities are between 4.5 per cent and 6.50 per cent. Referring to the RBI's annual policy statement, the survey said the policy stands for providing adequate liquidity and support investment and export demands.

The RBI will follow an interest rate environment that is conducive to maintaining the growth momentum and macro-economic and price stability.