The Hindu Business Line : Interest rates likely to harden, says S&P

The reasons for interest rates to be under pressure, according to Mr Ping Chew, Director, Asia Sovereign Rating, are domestic inflation, hardening global interest rates, and stronger credit demand. Mr Chew was speaking to newspersons on Tuesday.

There could be hardening of about 25 basis points in interest rates. "We have come out of the time when rates were policy-driven. Now, they are market-driven," said Mr Ritesh Maheshwari, Director, Financial Services Ratings, S&P. The rising Government securities' yields are the best indicators of interest rates, he added.

Referring to India's fiscal deficit, Mr Chew said that it is not likely to meet the target of 4.3 per cent of GDP, due to increased expenditure.

However, India's economic prospects continue to be robust and favourable. "Deficit will remain high despite high growth."

S&P raised its rating for India to B+, which is one level below investment grade, in February.

The seven per cent growth in GDP was driven by industry and services. But the revised estimates of 8.3 per cent growth cannot be sustained due to the high fiscal deficit.

According to an S&P-Crisil report on Indian corporates released today, many companies in India have borrowed more to finance expansion despite robust cash flow generation from positive economic factors.

Those choosing to rely substantially on debt to finance their growth could face significant challenges that could weaken their credit profile. In the medium term, sales growth is unlikely to reach the projected figures as input prices are going up for some commodities.

S&P has taken a stable outlook on the Indian banking system. Indian banks are stronger than Chinese banks in terms of financial profiles. But Chinese banks are rated higher due to the extent of support from the Government to provide resources through capital injections and sale of the banks' NPAs to Government-owned asset management companies.

Mr R. Ravimohan, Managing Director and CEO of Crisil, said that profitability remains a big challenge for banks as treasury income is dying out and fee income will take time to build up. It is critical for Indian banks to regain pricing control on their lending portfolio.

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Interest rates likely to harden, says S&P

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