Interest rates might go up, says FinMin

Reflecting hardening interest rates scenario in the country, a finance ministry report has said prime lending rates of five major banks were ruling at 12.75-13.25 per cent as on August 17 as against 10-11.50 per cent a year ago.

Deposit rates stood at 8-9.50 per cent, compared to 6.25-8 per cent as on August 18, 2006, the report for the month of August stated.

The increase in interest rates has curtailed the demand for consumer durables, analysts say.

"Higher interest rates have not dampened business investment as a very buoyant long-term economic outlook has outstripped a cyclical rise in borrowing costs," but would discourage consumer spending, Asian Development Bank has said in its latest report on Asian Development Outlook.

Interest rates hike also resulted in a slowdown in the pace of construction

activities, it stated.

Industrial growth declined to 7.1 per cent in July 2007, compared to 13.2 per cent a year ago. Cumulative growth in April-July witnessed a decline to 9.6 per cent from 11.1 per cent in the corresponding period last fiscal.

The biggest casualty to the fall in demand was the manufacturing sector which registered a dampening of growth to 7.5 per cent in July from 14.3 per cent a year ago.

Moderation in demand notwithstanding, ADB has revised upwards its projections for Indian economic growth to 8.5 per cent for 2007-08 and 2008-09, against its earlier forecast of 8 per cent and 8.3 per cent respectively.

The industrial slowdown has, however, prompted business chambers to ask the RBI to ease its stance saying higher interest rates are affecting the investment environment in the country.