Get ready for harder interest rates

The 25 basis point rise in US Federal Reserve rate is yet another indication that overall interest rates in India will firm up, bankers say....

The 25 basis point rise in US Federal Reserve rate is yet another indication that overall interest rates in India will firm up, bankers say.

In fact, the cost of funds will not only shoot up within the country, corporates looking to raise funds through external commercial borrowings will find an increase in cost of borrowing. ‘‘The days of benign interest rates are over,’’ declares D R Dogra, executive director of rating firm, Care.

On Tuesday, the Federal Reserve — the American central banker — hiked rates for the third time by 25 basis points to 1.75 per cent. ‘‘We are expecting the Fed to increase its rates further in the coming months. The RBI is likely to hike the bank rates by the monetary policy expected in October by at least 0.5 per cent,’’ said Pawan Bajaj, Chief Forex Officer of Bank of India.

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On Wednesday, prices of benchmark 10-year Indian bonds edged up slightly to 6.15 per cent from 6.12 per cent with dealers saying that Fed rate hike did not impact the bond markets much. ‘‘The hike in Fed rates was already discounted by the market. Hence, government securities and bond prices remained steady,’’ said Corporation Bank Chairman and Managing Director, K Cherian Verghese. ‘‘But corporates can always hedge the risk of increasing rates through various instruments as prices will move up now,’’ he added.

Agrees Arun Kaul, GM (Treasury), Punjab National Bank: ‘‘At present, the borrowing rates abroad is still lower and if the forward rates are low corporates can look at borrowings from abroad.’’

At present, Indian banks have a huge portfolio of government bonds and whenever there are concerns of interest rate hikes, bankers were anxious about the status of their bond portfolios. The RBI had recently provided relief to banks by relaxing norms with respect to their investment portfolios. Adds S S Kohli, Chairman and managing director of PNB: ‘‘For us what is more significant right now is the inflation figures which are expected this week.

Corporates, meanwhile, put up a brave face: ‘‘I do not see any major impact of the Fed rate hike on the borrowing pattern of Indian corporates. The Fed rate hike was marginal than expected. The US economy is also trying to moderate the effect of inflation much in the same way the Indian economy is going about it,’’ says Arvind Parekh, director (finance), Jindal Stainless.

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‘‘More than the interest rates it is the rupee dollar fluctuation and movement which would influence the borrowing plans of Indian companies from abroad. Stable exchange rate will help us to get funds cheap from abroad,’’ he added.