Purwar says inflation, oil concerns

Maintaining his view that interest rates would be stable in the short term, State Bank of India (SBI) chairman A K Purwar said that the rising US interest rates and the Indian government's borrowing programme could put upward pressure on Indian interest rates.

"Oil prices are a cause of concern as they are touching historic highs and any further rise in oil prices can trigger further inflation. The inflation rate and world oil prices are the two critical factors that will determine interest rates. If inflation is kept within reasonable limits, then the interest rates are expected to settle down," said A K Purwar at the sidelines of the annual conference organised by the Fixed Income Money Market and Derivatives Association of India (Fimmda) here today.

"Barring oil prices, I expect inflation to be around 5 per cent. Global oil prices are hard to predict," added Purwar.

On the postive side, liquidity is comfortable despite the robust credit offtake and inflation is falling which argues for softer interest rates. But on the flip side there are rising US yields and the larger borrowing programme, he said.

The government has raised its borrowing programme for the coming fiscal to about Rs 1,04,000 crore up from Rs 90,000 crore.

Purwar also pointed out that Indian yields are higher than those in other Asian markets.

"The ten-year government secutiry in South Korea has a yield of 4.8 per cent whereas an Indian paper of similar maturity has a yield of 6.56 per cent even though our inflation rates are comparable," explained Purwar.

In these uncertain times, banks need all the tools they can get to take care of the interest rate risk. According to him, new derivative products like interest rate options in Indian rupee and credit derivatives are the next logical development in the process of the evolution of the market.