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July 4, 1998


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External borrowing dearer by 75 basis points: report

The current outlook on the rupee is being driven by mostly negative forces that comprise huge fiscal deficit, high government borrowings, drainage of liquidity for financing borrowings of the government and private sector enterprises, sustained inflationary pressure, low export growth and expectations of higher interest rates.

According to a ICICI Securities and Finance Company (I-Sec) report, the economic outlook of Asian countries does not provide support to increased exports.

In fact, possibilities of dumping continue to haunt domestic industry. With domestic demand not showing any concrete signs of revival, the fiscal arithmetic poses threat to the government's finances and therefore increased borrowing.

The inflation rate is expected to be around 8 per cent if the recovery in final demand are to materialise, it said.

The I-sec report pointed out that the US-led sanctions aided by Moody's downgrading Indian papers had directly affected external flows of funds into India as well as cost of capital for domestic corporates and Indian banks abroad.

The Reserve Bank of India has already signalled an upward move in medium-to-long term interest rates by fixing the benchmark 10-year at 12.1 per cent up to 10 basis points.

Though certain direct policies impacting inflationary expectations have been whittled down, the I-Sec report said it was due to political pressure.

The report attributed the current rise in inflation to the past cost hikes which were not completely passed on to consumers due to weakness in final demand. The current inflationary expectations would also hinge on the ability of producers to raise prices, implying a revival in final demand.

As the cost of external borrowing has increased by 75 basis points since the conduct of nuclear experiments, the domestic market is the only source to raise capital for corporates. So also infrastructure requirements.

Reiterating that the liquidity balance is tight, it said that any spillover from the fiscal front, assuming external capital flows do not fill the gap, would put pressure on interest rates.

The net outflow of liquidity from the system in the next fortnight alone would be around Rs 15 billion and liquidity is likely to be tight through July with major inflows of funds expected only on July 31.

However, in case of a tight situation, the Reserve Bank of India may inject liquidity through a cut in cash reserve ratio.


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