A study of interest rates in India: A report; ICICI Securities and Finance Company Ltd.

Abstract

The objective of the project was to study the interest rates in India. For this purpose, the areas identified for study were the treasury bill rate and the call money rate. A theoretical background is presented in which the three main theories of interest rate i.e., the classical theory, the loanable fund theory and the liquidity preference theory are discussed. The deficiencies of the administered rates in India since independence is also discussed. In the next section, treasury bills are discussed. Next, a short term regression model for interest rate (treasury bill rate) was constructed. Implicit yield on 365-day treasury bill was taken to be the representative of the interest rate structure in the country as it is the closest approximation to a competitive rate, also it was assumed that since this is the rate at which the government “borrows, all the other rates fixed would be based on this. This assumption is supported by empirical evidences which shows a high correlation between treasury bill rates and other interest rates in the economy. Among the various factors tested , index of industrial production turned out to be the most significant and-hence was used to. develop the linear regression model. In the short-term analysis, a multiple regression could have been developed but due: to lack of appropriate tool, the model was abandoned. When the linear mode] was developed, Natex-100 was the most appropriate variable for the purpose among the variables tested.