KARACHI - Karachi Inter-bank offer rate for the six months tenure has slightly declined by 58 basis points to 15.10 per cent during the month of January 2009. This fall is being attributed to liquidity improvement in the inter-bank and other market interest rate markets taken place during the period under review. However, banking experts are saying that in the backdrop of current discount rate of 15 per cent, the 6-month KIBOR is likely to come down at below 15 per cent during the current quarter of FY09. According to experts, due to the slowdown in the benchmark lending rate (KIBOR), financing cost of the industrial borrowers might decrease but the mark-up income of the banking sector is expected to squeeze a bit, posting deceleration in the growth of sector spreads. During first week of January 2009 the 6-month KIBOR touched its peak and reached highest level of 15.68 per cent while since the beginning of last week it had started to decrease being landed at 15.30 per cent. Similarly maintaining this pace, as on January 31, 2009 KIBOR for the six months period had sharply drop to 15.10 per cent and 3-month term it retained at 14.41 per cent keeping a view that market-related liquidity shocks had been eased off to an extent. It is important to mentioning her that the response of KIBOR and other market interest rates to the hike in policy rate in November has been neutral, indicating rise had already been incorporated by the market. Meanwhile, SBP report pointed out that the KIBOR of all tenors remained almost unmoved since the announcement of Interim Monetary Policy Measures until very recently when the 3-month and 6-month KIBOR recorded a slight decline. As on 30th January 2009, both the 3-month and the 6-month KIBOR of 14.5 and 15.2 per cent are lower than their respective levels of 15.4 and 15.7pc as on 12th Nov 2008, just before the increase in the policy discount rate. Earlier, during late October and start of November 2008, KIBOR had risen sharply due to tight market liquidity conditions and in anticipation of the policy rate hike. This indicates that the banks had already built in their expectations the need for such a hike in the wake of worsening macroeconomic situation and high inflation in the economy. Similar to trends in the Inter bank interest rates, the retail rates also eased during the last two months of 2008. In December 2008, the weighted average lending and deposit rates, on incremental basis, stood at 14.3 and 8.9 per cent. As the decrease in lending rates was much sharper than decline in the deposit rates, their spread contracted by 62 bps to 5.4 per cent. Consequent to a decline in the lending and deposit rates on the one hand and rising annualized inflation on the other, the real lending and deposits rates have declined further. This decline has negative implications for the economy's dire need for increasing domestic savings that are necessary to meet investment requirements. The consequences of a widening saving-investment gap and increasing reliance on potentially volatile foreign savings to bridge this gap are clearly evident in FY08 developments in the wake of the global financial crisis. The evaporation of foreign inflows in FY08 exposed the unsustainability of the external current account and fiscal deficits and resulted in a fall in reserves, considerable depreciation of rupee, and consequent rise in inflationary pressures. Report also said that the Weighted Average Lending Rate (WALR) on incremental loans has eased somewhat (14.3pc in Dec 2008) leading to a fall in the real interest rates. As has been argued by the SBP in previous Monetary Policy Statements, it is the real interest rate that needs to increase in order to bring the domestic savings in line with the investment requirements of the economy. Failing to do so has resulted in a continued and unnecessarily increasing reliance on foreign savings. This provided little incentive to align domestic aggregate demand with the productive capacity of the economy. Eventually, shocks to foreign resources in 2008 such as the global financial turmoil and domestic turbulence exposed the domestic vulnerabilities and resulted in a fall in reserves, considerable depreciation of rupee, and a persistent rise in inflation.