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Real interest rate is likely to rise in the current year due to the falling inflation and steep correction in gold prices, prompting investors to park money in bank deposits, says a report by Deutsche Bank.
Real interest rate is measured by deducting policy rates from wholesale price based-inflation (WPI).
"Real interest rate has begun to turn positive. Looking ahead, we believe there is a substantial downside to inflation this year, which will be greater than the expected decline in the policy (or effective) rate. Real interest rate, therefore, will be rising through the course of the year," the report said, adding as a result the incentive to deposit money in banks will rise.
It also said that with decline in gold prices, a substantial shift from the zero yielding asset to deposits with positive real rate of return could take place.
It also noted that normalisation of inflation and rising positive real rates would result in a more liquid and functional market for financial intermediation, supporting growth of banks.
The report stated that balance of payment situation will improve in the current year with lower current account deficit on the back of lower gold and oil prices.
"We are now forecasting current account deficit to be 3.8% of GDP in FY14, sharply lower than our previous forecast of 4.7% of GDP," it said.
"We also see a BoP surplus of $5 billion, which leads to a constructive rupee outlook," it added.
On the rupee front, the report said domestic currency would head towards 53 level but not considerably below that level as the RBI may use the bullish rupee environment to build up forex reserve, restricting substantial appreciation of the currency.
