Vaghul says interest rates will rise in 2005-06

It is the beginning of the end of soft interest rate regime. Falling bank rates are likely to take a reverse route and start firming up towards the end of next fiscal or the early part of 2005-06, said the chairman of ICICI, the largest private sector commercial bank, N Vaghul. Rates are not likely to fall any further till that time.

Talking to newspersons at the sidelines of an interactive session organised by the Indian Chamber of Commerce (ICC) in Kolkata today, Vaghul said the present liquidity in the system was still adequate to cater to demand for credit from sectors like housing, and infrastructure development.

The liquidity was likely to remain in excess of demand for credit through the remaining part of the current fiscal and the whole of the next fiscal.

"It was likely that the liquidity in the system would dry up then, following which demand for credit would exceed the liquidity in the system and bank rates would start firming up," he explained. Asked when, rates would fall further in the intervening period, Vaghul said that the possibility was next to nil.

Rise in demand for credit would mostly be fuelled by demand for loans from the infrastructure sector followed by the housing sector and demand for industrial credit. This was because the industry would have to go on expansion path to cater to their demand.

Talking on the state of infrastructure in the country, Vaghul said, the government was likely to concentrate on urban infrastructure in the next couple of years and that would lead to rising demand for credit and that would be the time when the liquidity in the system was likely to disappear leading to interest rates rising.

Talking the rate of growth of GDP, Vaghul said that the much talked about 10 per cent rate of GDP growth would not be attainable until the government adopted specific policies to boost the economy.

He also said that the decline in agriculture sectors share in the GDP would have to be compensated by corresponding growth in the industrial and the services sector.

Services on the other hand had tremendous opportunity from bio-technology, financial services and tourism.

Commenting on the government's economic policy the chairman concluded by saying that it was the economic divide which was likely to hit the nation and not the much talked about communal divide.