Interest rates, inflation to go up, rupee to see steeper fall

The interest rates are expected to go up in the short term as the cash-strapped government is fast absorbing the liquidity through government securities and the inflation too is expected to trend upwards amid higher energy prices, according to a research arm of a leading stock broking house. 

The excess liquidity which peaked at Rs.370 billion at the beginning of this year has come down to Rs.62 billion, by the second week of July 2015, demonstrating the rate at which the government had been borrowing through Treasury bills and bonds during the first six months. 

According to JB Securities, the banks are slowly increasing their fixed deposit rates in the order of 25-50 basis points. However, the banks which maintain a higher Current and Savings Account (CASA) ratio will benefit from the rising interest rate environment as these deposits are not repriced. 

The commercial bank Average Weighted Deposit Rate (AWDR) edged up to 6.02 percent by the end of June from 5.95 percent a month ago while the Average Weighted Fixed Deposit Rate (AWFDR) edged up to 7.29 percent from 7.12 during the same period, the Central Bank data showed.   

However, this is in contrary to Standard Chartered Bank which expected a further 50 basis point rate reduction during the second half of 2015 amid low inflation and moderate growth.   

JB Securities further said that the current benign inflation will also trend up towards the latter part of 2015 on the back of the higher energy prices, as the administered retail energy prices will have to be revised up due to higher Brent crude prices and weaker rupee. 

“Average inflation will trend up to 4 percent due to higher retail fuel prices –this is within CBSL stated target range of 3-5 percent,” JB Securities said in its equity strategy report for 2015/16. 

JB Securities expects a steeper depreciation of the rupee by between 3-4 percent post-election as the currency is already under pressure due to strong dollar and capital outflows. 

“CBSL continues to intervene in the market, propping up the currency-a policy without merit and one presumes it’s more to do with election posturing,” they said. 

All in all, JB Securities estimates the economy would not grow above 6.5 percent (as measured by the 2002 base) due to fall in construction growth which accounted for 20 percent during the post-conflict period. 

However, the research unit is of the belief that voting back the existing government into power will bode well for creating an investor-friendly environment. 

“If the current government is voted back into office there will be greater efforts in improving the investment climate through enacting legislation to improve investor protection, targeted incentives and more business-friendly procedures and policies with the aim of improving on the country’s ranking as per the World Bank’s doing business index,” JB Securities said.