There is large divergence in yield rates on instruments of similar maturities. The RBI annual report 1996-97 has acknowledged that the central bank's measures to bring down the interest rate was seen only on the shorter maturities. The longer term rates have remained sticky in FY97 because of inflationary expectations. And though the inflation rate has secularly come down since the beginning of the year, it has not been able to change the perception about the future inflation rates. Experts, therefore, feel that the long-term rates may not come down significantly.
Inflationary expectation depends on the movement of core inflation level.
Transitory inflation factors do not influence expectations in the long run. Thus, even after the increase of 30 per cent in oil prices in July 1996 and the revisions of the administrative prices of primary products towards end 1996, the inflation level this year has been tapering after having risen immediately after such revisions. Like last year, this year also the inflation level may drop after absorbing the initial impact of oil price hike. This would be moderated on the back of good agricultural production. Of course, this would depend on higher foodgrain procurement.