Markets await interest rate cut

Markets await interest rate cut
ENS ECONOMIC BUREAU

FEB 13: Bankers and corporates are expecting a reduction in interest rate in the coming weeks in line with the global trend of softening rates. Markets are agog with speculation that the government will reduce the interest rate on small savings schemes and provident fund which will be followed by a cut in bank rate -- the benchmark rate at which the Reserve Bank refinances commercial banks.

Expectations of lower interest rates have been building up in India's financial markets ever since the US Federal Reserve indicated an easing of its monetary stance in late December. This talk gathered momentum with each of the Fed's two rate cuts in January. Traders expect the Reserve Bank of India (RBI) will follow the Fed's moves at some time in order to maintain the interest rate differential between the two countries.

Many bankers expect the RBI to make a decision only after the Union Government's borrowing needs for 2001/02 (April-March) are announced in the Budget on February 28. The market expects the Budget to contain some steps towards reducing borrowings based on the Fiscal Responsibility Act that was tabled in Parliament in December. The Government budgeted its gross borrowings for the fiscal year ending on March 31 at Rs 1,17,000 crore.

Share prices of commercial banks had shot up in the last couple of sessions following rumours of an interest rate cut. The primary market for corporate bonds has also ground to a virtual halt as companies has postponed issues in anticipation of lower interest rates. "Issuers not in dire need of funds will prefer to wait and watch, hoping to finance themselves at cheaper levels in expectation of a rate cut," said a banker.

So far this month, about Rs 350 crore ($ 75.35 million) in issues have been announced, in sharp contrast to the six months to December when companies raised debt worth about Rs 23,000 crore through primary market issues. Traders say corporate issuers were taking their cue from the government debt market, where yields have been falling as bond prices rose on rate-cut hopes and excess liquidity.

"Issuers in the market are simply waiting to see if the rally in the government securities market is going to last before they come out with fresh issues," said a bank official.

Among prospective corporate issuers who are holding back are Small Industries Development Bank of India (SIDBI), which was due to launch a Rs 300 crore issue earlier this month, dealers said. Similarly, state-run Indian Overseas Bank, which was due to tap the market earlier this month for Rs 125 crore, has postponed the bond issue till rates ease, they said.

Uncertainty over the timing of the reduction move and the resultant lack of corporate activity had widened spreads between company and government debt, dealers said. "Spreads between government securities and corporate bonds have widened from around 80 basis points in early January to around 105 in recent days. This is primarily because the government curve moves much faster then the corporate bond curve," said stock dealer Pawan Dharnidharka.

"There have been no credit concerns as such. It's just that (yields on) the underlying government securities have moved lower," he said. This situation is expected to change after March, dealers said.