Interest rates on Govt bonds to harden for 2 yrs: IEG | business | Hindustan Times
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Interest rates on Govt bonds to harden for 2 yrs: IEG

The soft interest rate regime is now over with the rates on government securities likely to harden for at least two years.

business Updated: Jan 05, 2006 13:59 IST

The soft interest rate regime is now over with the rates on government securities likely to harden for at least two years, economic think tank Institute of Economic Growth (IEG) has said.

The prime lending rate of banks is also unlikely to go down because of the hardening of interest rates on government securities, the institute said in its latest monthly periodical, adding that banks may have to improve the operational efficiency to restrict the rise in PLR.

Pointing out that the Indian financial markets are now linked to global financial system, Monthly Monitor, brought out by IEG, said except for call money rate, all yield rates are expected to move upwards following the upward movement of the international interest rates.

"The soft interest rate regime witnessed during the late 1990s and the early 21st century is now over. The government would have to, therefore, borrow at a comparatively higher cost," IEG said.

The upturn in the interest rates on government securities, which started recently, is now likely to continue for at least about two years, the institute said but added that it may taper off at a peak much lower than recorded during the high interest rate regimes in mid-1990s.

Elaborating the reasons for this trend, the institute said the real interest rate seems to have reached the floor during the industrial slow down of early 21st century.

Besides, the industrial recovery from about 2003 onwards together with the rising international oil prices created a rising inflationary expectation, which have also contributed to this upturn in the interest rates, IEG said.