Interest rates likely to move up further

New Delhi, Aug 6 (UNI) Amidst a tug of war between the commercial banks and the Finance Ministry following revision in the Prime Lending Rates (PLRs), the interest rates are likely to move up further and have not yet peaked, a well-known think tank has said.

''On the interest rate front, we might see further hike in the coming months as the current upward movement in the interest rate cycle is yet to peak'', the Institute of Economic Growth (IEG) has said in its Monthly Monitor.

In an other significant forecast, the prestigious IEG said the inflation expectations set at 5.5 per cent by the Reserve Bank of India for fiscal 2006-07 may be breached.

On the back of the July 25 decision of the Reserve Bank of India to increase the short-term interest rates by 25 basis points, most of the public sector banks like the Punjab National Bank and the State Bank of India had raised their PLRs ranging between 11 and 11.5 per cent.

Upset over the decision,the Finance Ministry asked the banks to get the rate revision approved by their boards over which the Central Government has its nominees.

Finance Minister P Chidambaram, reacting to the criticism of his ministry's interference in the functioning of the banks retorted saying ''what is wrong with the advice''.

The Finance Ministry is of the view that any hike in the interest would play the spoilsport in the GDP growth which has been showing a consistent performance for the last three years.

However, the RBI in its wisdom placed bias towards increasing interest rates, if the choice was between the growth and controlling the price rise. This was clearly indicated in the quarterly review of the Credit Policy.

''It is critical that underlying inflationary pressures are contained and that inflationary expectations are anchored for supporting economic growth and financial stability'', RBI Governor Y V Reddy said in his policy speech.

The IEG said over 18 per cent money supply and the uncertainty in the oil prices could push the inflation rate much beyond the level set by the central bank, necessitating it to further tighten the monetary policy.

''We expect the inflation rate to increase further due to incomplete pass-through of world oil prices and due to some seasonal factors. Huge money supply growth, which is at 18.8 per cent and uncertainty in the world oil markets could push the inflation rate to above 5.5 per cent by the end of 2006-07'', it said.

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