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Real rates of interest hits historic high

It was a turbulent welcome to new governor of the Reserve Bank of India Bimal Jalan as the Indian rupee declined over 5 per cent against US dollar, during the month ended November 30,1997.

The gradual decline in the rupee value was witnessed during the first fortnight, whereas, in the second fortnight it crashed to historic low in spite heavy intervention by RBI. The downtrend has continued in the current month on hectic demand from corporate sectors and speculators.

Jalan, in his maiden conference in Bombay on December 2, announced a series of measures to check volatility in the forex market. This reflected in the market and the rupee recovered sharply to Rs 39.23-37 at close, after being traded at historic low of Rs 39.82-92 during an intraday trading on December 2. He warned the speculators that apex bank will not remain silent forever in the face of an ever-falling rupee.

The apex bank has announced the cash reserve ratio on domestic net time and demand liabilities has been increased from 9.5 per cent to 10 per cent with effect from December 6. Interest rate on fixed rate repos has been hiked from 4.5 to 5 per cent from December 2 and authorised dealers are now required to book forward contracts for clients based only on documented evidence of underlying exposure, the ICICI Securities and Finance Company Limited said in its debt market update reports.

In the month of November, the central bank announced strong incentives to curb the downfall in the Indian currency which includes CRR reductions which have been deferred by over a month with the new scheduled of CRR cuts beginning from January 31 to April 11, 1998.

The fixed rate repos have been introduced. The interest rates on post-shipment export credit had been increased from 13 to 15 per cent for utilisation from 90 days to 180 days with effect from November 28. The RBI had also decided to monitor all cancellations of forward contracts in excess of US $500,000. However, these measures did not have the desired impact on the forex market, the report added.

The current fortnight shows a severe shortfall of Rs 55 billion, largely on account of the estimated outflow of Rs 70 billion towards advance taxes.

At least for the last two years the real interest rates have been hovering between 6 per cent to 9 per cent. During April 1994 and December 1995, the real rates have been distinctly below the 6 per cent mark, following strong foreign inflows which resulted in depressing domestic interest rates and stocking inflationary pressure due to the inadequate/delayed sterlisation operations of the central bank.

The government securities yield curve has moved upward by 20 to 25 basic points at the shorter end while the medium and long end of the yield curve remained largely unaffected. Low premium securities such as 10.85 per cent 2001 and 11.19 per cent 2005 attracted large trading volumes over the past fortnight.

The yields basic points would likely to harden during the current month and it will also affect long term curve of gilt edged securities.

The call money rate ruled fairly easy, below the 6 per cent throughout the past fortnight due to the outstanding amount in the 14-day treasury bills which declined from Rs 62 billion to Rs 17.8 billion on November 28, the ICICI debt market report added.

UNI