Interest rate to dip 4-5% by July: Kamath

Interest rates are set to fall by up to five per cent in the next six months as inflation is moving towards zero level, a situation that will make India a low-cost economy and a winner globally, ICICI Bank CEO and Managing Director K V Kamath said on Sunday.

"All I can say is that four-to-five percentage points correction in interest rates from where it is today...this correction, I think, will be by July...this is where the interest rates are tending in six months from now," Kamath said in an interview.

Crystal-gazing the economy for 2009, ICICI Bank chief said, "Not from quarter starting April. But, I would think that interest rates would head towards single-digit levels from the quarter starting July. I clearly see that happening."

 

Kamath, however, declined to comment on what the lending rate of ICICI Bank, in particular, would be by that time, or whether his bank would lead the plunge in interest rates. ICICI Bank's PLR currently stands at over 16 per cent.

Apart from the price-line moving southward, the trend of declining rates for bank deposits and falling rates of bonds in Indian market would help banks bring down the cost of credit to the industry.

"The speed with which, say for example, bulk (deposits) have repriced themselves at 2-2.5 per cent in a span of just two weeks gives me comfort to say what probably is going to happen," Kamath noted.

The bond prices have started correcting themselves and are going towards four per cent mark, he said, adding that these had already come to 5.5 per cent from 8.5 per cent.

"Secondly, banks are repricing their own deposits lower...deposit rates are going down by 100-150 basis points or so...inflation is also coming towards zero," he said, while forecasting that the bulk deposit rates in India would stabilise at 8-8.5 per cent from a peak of 12.5 per cent till recently.

Currently, banks are offering up to 10 per cent interest on fixed-deposits by retail customers, while institutional and corporate customers' bulk deposits are higher in value and get a special higher rate from the competing banks.

"Interestingly, we are heading towards deflation that is very clear, or rather we are heading towards very low level of inflation let me put that appropriately also means that bond prices have started correcting themselves...

"Along with the bond price correction we are seeing very rapid correction starting to happen in banks pricing of debt. On the deposit side it has just started. So we are not seeing it fully passed to the customers," Kamath said.

"I would expect between from 3-6 months from now we will see banks' deposit books repriced downwards, translating into lower cost from customers...the full repricing is expected to be completed by November, but a significant impact of it would start surfacing by July," he added.

Asked if the banks would start the process of swapping the costlier debts taken by the industry till middle of this fiscal when the credit was being given for rates of even over 20 per cent, Kamath said that there was a comfort level for the corporate world, because the average debt-equity ratio was 1.5:1 as against 3:1 that was prevailing in mid-1990s.