Interest Rate

This paper examines whether in the financially deregulated regime, shift in the financing pattern of the fiscal deficit away from seigniorage and external debt financing to bond financing has the probability of creating an upward pressure on the rate of interest in India. Using an asymmetric vector autoregressive model, we found that in the deregulated financial regime, the fiscal deficit did not create a rise in the interest rate. Rather, the causality runs from the exante real rate of interest to fiscal deficit. This result is in conformity with the recent trend in Indian public finance where the high interest rate fuelled the accumulation of more debt through increase in interest payments and the consequent debt-deficit spiral.

Market determination of interest rates often leads to volatility which has particular relevance to management of the interest rate risk in general and management of fixed income portfolios in particular. Given the size of bank portfolios, volatility of interest rates and need for rigorous performance evaluation, appropriate management accounting systems are essential.

This is the third of a series of articles discussing the different issues involved in asset liability management by banks. The last article had argued that from the angle of pricing assets and liabilities a clear and quantified articulation of a bank's strategic objective is needed and this will need to be an adequate return on investment. This article discusses a few other points arising from the regulatory framework.

The traditional face of banking is undergoing change - from one of mere intermediator to that of provider of quick cost effective and efficient services. In most emerging economies the banking sector is having to face difficult challenges. A discussion on these challenges and issues arising as a result of the ongoing financial sector reforms is important. What are the weaknesses in the system and how may it cope with the critical issues which will arise as a result of the reform process?

With all-round downward movement of rates of all types and maturities in the past three years, near-stability in the interest rates profile has been achieved. RBI policies of low Bank rate, active management of liquidity and signalling its preference for softening of interest rates have contributed to this development.