COMMENTARY
INTERVIEWS
SPECIALS
CHAT
ARCHIVES

Interest rates set to rise further, says J P Morgan

There can be little doubt about the direction in which interest rates are headed, and, events of the last fortnight further endorse this view, says a release issued by J P Morgan Global Research.

The steep rise to 9.05 per cent in the 364 day treasury bill cut-off yield has come as a surprise to the market, particularly since the yield had held steady at 8 per cent for more than nine months. The jump in yield is an indication that the Reserve Bank will allow rates to increase to market clearing levels, the release has said.

The last fortnight saw a fairly handsome off-take from the RBI's open market window, exhausting its stock of the devolved 11.55 per cent 2001 and Rs 5.26 billion of 11.75 per cent 2003. Large open market sales also indicate that though over 50 per cent of the government's gross borrowings have been completed, there is little comfort to be drawn from this fact. There will be steady supply of government paper right through the year, and even if there is a CRR cut, not that one is expected soon, the drop in yields will only be temporary.

With market appetite for long term assets waning, the Reserve Bank has been quick to adjust its borrowing strategy by raising large amounts at the medium and short end of the curve by offering slightly higher interest rates.

"We are likely to see larger amounts being raised in the less than five year segment by the RBI, offering higher rates, though yields at the linger end may be slow to rise."

For the market, it seems like a ''no-win'' situation. The capital risk on investment in long duration assets might not be too dissimilar from investment in shorter duration assets where the yield rise could be much faster and steeper. The only way out could be deploying in cash or near cash, self liquidating assets (repos, 14 day T-bills) and investing gradually in one- to three-year securities during the upward move in interest rates.

UNI