Interest rates to rise, says IEG

Institute of Economic Growth on Friday said domestic interest rates are set to rise in the short term due to surging inflation and hike in international rates.

The IEG, however, expects rates in the economy to come down in the medium term because of fall in money supply due to widening trade deficit and import duty cut on petroleum goods and steel.

"The extent of rise (in rates) would largely depend on RBI's policy stance," IEG said.

It said the yield on 10-year government paper has already risen by one per cent and short-term call rates have gone up to touch 4.5 per cent.

On the present high inflation rate, IEG said it was due to rise in fuel price, manufactured products and primary items. "The spin-off effect of the hike in fuel prices might be felt on the other commodity prices in the coming months."

However, it added that with the arrival of monsoon, although late, reduction in import duties and expected decline in money supply growth would restrain prices from rising further.

Corroborating the spurts in inflation to the present high money supply, it said the supply had increased despite dip in foreign exchange reserves.

The money supply growth stood at 15.7 per cent in August 2004, much above the target rate of 14 per cent to contain the inflationary tendency in the economy, it said.

The economic think-tank also predicts that the bearish market sentiments could result in FII outflows.

 IEG said depreciating rupee, which touched an 11-month high of 46.5 against the greenback in August, could rise further in the coming months.

"The recent increase in the US interest rate might hamper the dollar supplies and put pressure on the rupee to depreciate in the coming months," it said.

It pegged that the rupee would hover around 46.5 in the coming three months.