Volatility and choppiness marked most part of calendar 2004. Interest rate going forward, looks stable but with some amount of upward pressure on account of inflation, summed up A K Purwar, chairman State Bank of India.
The trigger for rising interest rates in 2004 was global economic recovery as all central banks calibrated their interest rates upwards.
Since May 2004, the US Federal Reserve has effected five rounds of rate hikes, raising the Fed rate from 1 per cent to 2.25 per cent during the year. Bank of England acted in 2003 itself and increased its rate from 3.5 per cent to 4.75 per cent in five tranches.
Another cause for a rise in interest rates was the inflation, which reached a high of 8.55 per cent as oil prices rose to an all-time high of $55-56 per barrel owing to output blockages.
This reversed the market sentiment and government security prices crashed in September-October with yields peaking to a high of 7.33 per cent for the benchmark 10-year paper. This reflected a rise of 218 basis points (one basis point is one-hundreth of one per cent) from 5.15 per cent at the end of March 2004.
Of late, inflation has started coming down with moderating oil prices. However, the banking sector seems to have adopted a very cautious approach towards the bond market given the buoyancy in the credit pick-up.
The reality of an upward bias in interest rates is what the bond market has to ultimately adhere to.
