The Hindu Business Line : S&P expects near-term rates to hold

STANDARD and Poor's (S&P) does not expect interest rates to come under pressure any time soon judging from the demand and supply position in the bond market.

But going forward, there could be an upward pressure on interest rates if the macro economy continues to hold strong, according to Mr Takahira Ogawa, S&P's primary analyst for India's sovereign rating, based in Singapore.

In e-mailed response to Business Line's query whether the low-interest regime will sustain in view of the compression in market drawings as indicated by the Finance Minister, Mr Jaswant Singh, in the interim Budget, Mr Ogawa said that the upward pressure on rates could adversely affect the fiscal position at both the Central and State governments.

On whether he thought that the `directed lending' bogey is at work in the Indian Banks' Association (IBA) being asked to lend below 9 per cent to farmers, he said this approach had not just worked well any time but has also created a powerful lobby amongst those borrowers who oppose any idea to move bank lending process to align with the market trend.

The problems facing these sectors are real but they are better fixed through other micro-economic reforms, such as changes in restrictive laws that deter investment in agriculture and agro-industry, rather than through directed lending by banks.

Asked how realistic were the lowered fiscal and revenue deficit figures and targets, he said there was a good chance to record "better than originally planned" fiscal deficit for the first time in several years thanks to the very good monsoon and stronger than expected macro economic performance and lower interest rate environment.

But Mr Ogawa found no good reason to believe that the fiscal deficit would be as small as 4.8 per cent as the Finance Minister indicated.

On whether there is any qualitative improvement in the deficit rather than a quantitative reduction, he said Government spending on investment had fallen in the last decade while that on salaries and administrative matters had increased.

"This is a worrying trend. Cutting the deficit through lower public sector investment is not sustainable."

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T.R. Madhavan is Dhanalakshmi Bank Managing Director