ICICI Bank chief says rates linked to bond yields

Banks may find it difficult to reduce interest rates unless yields on ten-year government bonds came down, according to K V Kamath, managing director and chief executive officer, ICICI Bank.

Speaking on the sidelines of the 44th convocation ceremony of the Indian Institute of Management, Calcutta, Kamath pointed out that one critical factor that is causing uncertainty at this juncture is the increasing fiscal deficit and consequent rise in government borrowing.

“There are concerns on the impact it will have on liquidity, pushing up interest rates. A clear articulation of how this will be managed, along with measures to encourage inflows into the country through external channels like foreign currency deposits by non-resident Indians, would be important in enabling the country to meet the challenges of the coming year,” he said.

He further added that the current level of near-zero inflation did not fit with the 7 per cent bond yield, and that bankers expected that to be just below 5 per cent. “Unless there is a fix on the ten-year government bond, it is difficult for bankers to bring down the cost of funds. This is because of the large government borrowing programme,” he said.

On being asked if ICICI Bank was contemplating any cut on interest rates in the near future, Kamath stressed that no bank can individually bring down the interest rate.

“The overall cost of borrowing has come down, and banks will pass on the benefits of the rate cut. However, banks also need to project a little bit for the future, where there is uncertainty,” he said.

Kamath also said that he expected the gross domestic product (GDP) growth rate to be about 7 per cent in the fiscal 2009-10, and that quarter-on-quarter growth figures should look up. “Corporates are expected to invest in the coming days. But real estate, textiles and oil & gas are some of the sectors that are still reeling under the pressure of the economic meltdown,” he said.

“But it is important to remain watchful as events in the global market unfold. A prolonged global recession, which is not ruled out at present, can cause a further challenge,” he warned.