Tuesday, May 27, 2008

Interest Rates

News article in today’s Economic Times

“Sensing tight liquidity conditions country’s largest bank, State Bank of India has decided to raise interest rates on longer tenure deposits by 25 to 50 basis points.

SBI will offer 8.75% for 2 to 3years, 8.85 % for 3 to 5 year deposits and 5 – 10 years is 9%. The bank was offering 8.5% for all the three slabs earlier.”

The interesting part is not the rise in the interest rates in the short term 2-3 year range which is anticipated considering tight liquidity conditions and inflation which could clearly take sometime to cool down.

What is interesting is the offer of 9% for the the 5- 10 year term. Clearly the largest bank in the country is signalling that we could be in a high interest rate scenario over a much longer time horizon.

Are we making a structural change from a low interest rate environment which has fuelled asset price rise over the last 3-4 years to a higher interest rate zone ?

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