Interest rate cut anticipated after drop in inflation

With annual inflation at a 13-month low in the latest figures released by the government, bankers are predicting a corresponding fall in interest rates as well. ICICI Bank managing director and chief executive K V Kamath today said that interest rates are expected to soften further with the decline in inflation.

"There is clearly a downward pressure on interest rates and there is scope for further rate cuts," he said on the sidelines of a CII event. He added that home loan rates, too, would come down to single digits, as some of banks have already done so. (See: I freezes home loan rates at 8 per cent for one year)

Inflation fell to 3.9 per cent this week (See: Inflation at new 13-month low at 3.92 per cent), and this is likely to induce the Reserve Bank of India to signal a further interest cut in order to prop up demand, Kamath said.

Asked if private banks may also require a government hand-out as has been done for a few public sector banks, Kamath said, "ICICI had raised capital from the market last year and we don't think any bank is losing out due to fresh deposits being given to other banks. Our concern should be how to bring about a systematic cut in interest rates."

He also maintained that the Indian economy would grow at 7-7.5 per cent, and that the country was not facing a recession. "Although a few parts of the economy have been impacted, we are still doing well."

According to Sonal Varma, economist with Nomura, the "Weakening economic activity and lower than expected inflation data suggest that there is clearly more room for rate cuts. We expect the RBI to cut both the repo and reverse repo rates by 50 basis points before March and by another 100 basis points each by June 2009."

Yesterday, Reserve Bank of India (RBI) governor Duvvuri Subbarao said in Tokyo that there was room to cut rates, but the question was when and by how much. He cautioned that a fall in inflation did not necessarily mean that rates too would drop.