India interest rates-confusing signals !!

The government has sold 2.82 trillion rupees ($58 billion) of bonds so far this fiscal year from the 2.99 trillion rupees targeted in the first half ending sept.30. It plans to raise a record 4.51 trillion in 09-10. A global slowdown and then the worst dry spell in nearly 40 years have raised concerns that the govt. may overshoot its 10 trillion rupees ($206 billion) spending plan for 2009/10.

Banks have signaled the bottoming of interest rates in media .—10 year bond yields have risen by 159 bp to 7.5% so far this year But actual deposit and lending rates are unmoved from their lower levels. Interesting fact -- the central bank mentions that rising bond yields are not a cause of concern & interest rates would not come down until banks lowered their rates.

Ideally the rapid rise in long term 10 yr yields should have had some impact on the non-sovereign side of business as well in terms of deposit and lending rates. Now, just as when banks have woken up to the fact of higher yield curve and ready to re-align with the market conditions, the central bank has given an exactly opposite coment which would actually signal banks to hold their rates.

An year ago, the linkages with sovereign yields were very good. 1 year g-sec yielded 9.37% in july`08 . 1 year bank FD`s were offering anywhere between 9.5 to 11%. -though the incremental rate on 3yr or 5yr was lesser -it was still aligned to g-sec. Thereafter the g-sec yields collapsed and so did the deposit rates (not so much in terms of PLR`s). From Jan`09 the 5yr and 3yr g-secs have recovered almost 50% in terms of yield ........It remains to be seen as to how soon can the commercial banks raise their rates .