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Interest rates may go up further, says Institute of Economic Growth

The IEG said while drop in inflation would reduce the growth in demand for money softening pressure on the interest rates, the Indian corporates would turn more towards domestic sources of finance rather than borrowing abroad.

Toyota unveiled its Etios Motor Racing series at the Auto Expo 2012
Toyota unveiled its Etios Motor Racing series at the Auto Expo 2012

Contrary to expectations of decline in interest rates, well-known think tank Institute of Economic Growth (IEG) has a different forecast - the cost of borrowing may go up further.

"On balance, we would like to believe that market interest rates may increase further," the IEG said in its monthly monitor of the economy.

The IEG said while drop in inflation would reduce the growth in demand for money softening pressure on the interest rates, the Indian corporates would turn more towards domestic sources of finance rather than borrowing abroad.

This is because India Inc has become wary of raising funds from foreign sources through external commercial borrowings (ECBs) in the wake of uncertainty over value of rupee against dollar.

"Corporates may not increase their borrowings from outside the country as the rupee is depreciating even though interest rates are low there, which may have hardening effect on the domestic interest rates.." the IEG said.

RBI has been following a tight money policy to bring down inflation. It has raised the benchmark lending rates by 375 basis points to 8.50 per cent since March,2010. But with the inflation coming down, it was widely expected that the interest rates may follow a reverse trend.

However, the institute has a positive outlook for the stock market. It expects foreign institutional investors (FIIs) to remain positive on India. "...the flows are likely to pick up in the next three months as the crisis in the western economies may subside," it said.

In the medium term rupee is expected to appreciate improving prospects for return. These factors are "making Indian economy attractive for FII inflows in medium to long term", the IEG said.