Sucheta Dalal spoke to ICICI Bank MD and CEO, KV Kamath, on where the economy is headed

ML: You have just finished a massive capital raising exercise and now need to look at deploying the funds. How do you see the current economic scenario? Are interest rates really headed downwards?

KVK: We are ready for some reduction in rates. All the economic factors are in favour of that happening. Inflation is under control and liquidity has been tightened and the rupee is stronger. But, I think, structurally, interest rates have to come down, because that is the only way you can push lending again. The fear I have is that if you don’t do it, we will, willy-nilly end up slowing down the economy. Certain sectors, such as transportation equipment are already under pressure. If we have manufacturers under pressure, their vendors will be under pressure going right down to the SMEs. You are seeing exporters coming under pressure too. We probably don’t realise it, but we are very near to an inflexion point. If we don’t take some steps on the interest rate front, we will end up slowing down the economy.

ML: All banks seem certain that interest rates will come down. On the other hand, there is a lot of pressure from exporters, especially the IT industry, for not allowing the rupee to get stronger. How do you reconcile the two?

KVK: The interest rate scenario has a bigger impact. Take, for instance, the IT industry. With a stronger rupee , their growth of 40% will slow down to about 30%. As you said, they are already protesting loudly and  they have a voice. I think, there will be no overall job losses in the economy or even in IT and there will also be growth. Their profits will be impacted but not so much. On the other hand, the marginal exporter is wiped out already - the smaller he is the more vulnerable he is.

ML: What about the manufacturing sector?

KVK: The manufacturing sector will slide into single- digit growth, even if it may not be negative growth. More importantly, the $500 billion investment coming into India is essentially coming to manufacturing and infrastructure. We don’t want to be lending to this sector at 13%-14% interest. We know the consequences of that from the last time around. SMEs are already borrowing at 14% and 15%. At the margin, we have started pushing them to that rate. My plea is that we need to get them to breathe again.

I don’t think banks are going below 10% deposit rates in their minds because they are not sure what to expect.

In the last six weeks, I have said we will borrow money at sub-10%, on our terms, in the corporate deposit market. If we don’t get the money, it is okay. I have the luxury to do  this now and I can ride it out. I am trying to break this 10% hurdle… it is stuck in the mind of the lender and borrower.

ML: What kind of correction should we be having?

KVK: Honestly, the correction must be as follows. Between last year and this year, interest rates have gone up 33%, we need cover it back by at least  half. When we see a 1%-1.5%drop in rates, we can say we are really close to maintaining the growth momentum. The pipeline is still, I must confess, rather strong. No client has come and told me that I am now cutting back because I have had enough. But when you see the situation around you, it is only a matter of time before these worries start to surface. One thing is for sure. The interest rate increases have had an impact. The medicine has worked, now it is time for us to move on, since the patient has recovered. What we need is some policy signalling. There are no cues at all from the policy-makers and that is the way it has always been in India. You are expected to read signals and I hope we are reading them right.