The upcoming months might see a rise in the interest rates for short term loans. The interest rate hike is expected in the range of 25-50 basis points owing to the rise in the cost of funds due to the sizeable lending for 3G auction and advance tax payment. Moreover, increased rate of bad loans in the corporate portfolio has forced banks to lend more carefully to this segment.

As a resultant of this, it is expected that instruments like commercial papers (CP) and non convertible debentures (NCD) would find mroe popularity in the corporate sector.

The largest lender of the country, State Bank of India has already raised interest rates on short term corporate loans  by 25-50 basis points. According to a senior SBI official, another 25 basis points hike can be expected in the next month.

UCO Bank expects a 50 basis point rise in its deposit and lending rates in June. "Liquidity is becoming tight, and a rise in interest rate cannot be ruled out. We might increase the interest rate by 50 basis points in June, both in deposits and lending," said S K Goel, chairman and managing director.

In order to relax liquidity issues, RBI has raised the limit on bank borrowing under its repo facility by 0.5 per cent of their deposits.