Bankers expect hardening of interest rates by the third quarter of this fiscal reasoned by the high investment proposals set in the Union budget.

It is considered that the government will resort to market borrowings for fulfilling budget expenses. The increase in demand for fund is expected to raise the cost of capital.

The estimated gross market borrowing peg at Rs 4.51 lakh crore, as per the expenditure set in the budget for the current fiscal.

Explaining the anticipated trend, Yogesh Agarwal, chairman & MD, IDBI Bank, said, "As a part of the interest rate cycle, we have seen that in the past few months the interest rates have softened. The situation is now going to turn as in the third quarter, when the corporate demand picks up, one should be ready for higher interest rates."

Agarwal pointed, that the expected government borrowings will be reasons for credit take off - "The heavy government expenditure may not crowd out private investment. But in the next few months, interest rates will harden. There will be a change in the soft interest rate cycle and cost of funds will go up."

Bankers also expect demand off take from the corporate in near future, which will also push up the interest rate.

"World Bank has predicted a GDP growth rate of 5.5% for India. The prediction of RBI is 6-6.5%. So, a growth rate beyond 7% looks difficult," Agarwal added.

The benchmark prime-lending rate of the IDBI is at 12.75 percent. The bank denies scope for further reduction in the lending rates, considering the consumer price index, which presently looms around nine percent.

The bank has achieved growth of 56 percent and 26 percent respectively in deposits and advances during the last fiscal. As against this, the expected growth rate for the current fiscal is around 18 percent and 20 percent for advances and deposits respectively.

"The economy is not doing too well, so the growth will not be as it was last year," Agarwal added.

Agarwal indicated that the bank plans to set up its asset management company by the end of this fiscal. The bank has also sought regulator approval for establishing a private equity venture.