ICICI sees upward bias in interest rates

ICICI Bank Ltd, India's biggest by market value, expects the central bank to adopt a bias toward a further rise in interest rates even as growth in consumer borrowing slows in the fastest-growing major economy after China.

ICICI Bank last week raised its benchmark lending rate by one percentage point to 14.75 percent, the second increase since December, and increased the floating rate on home loans by one point to 11.75 per cent.

"Our internal estimates considering credit-deposit ratios and other factors show there could be an upward rate bias in six months to eight months,'' V Vaidyanathan, an executive director at the Mumbai-based bank, said in an interview with Bloomberg Television, without specifying by how much the rates could rise.

India's financial-services companies, including ICICI Bank and HDFC Bank raised lending rates after the Reserve Bank of India increased a key overnight rate on January 31 by a quarter point to 7.5 per cent, a four-year high, aiming to contain inflation and cool asset prices. The central bank has raised its rates five times over the past year.

"The Reserve Bank of India could raise rates again, as inflation concern still remain and growth in credit and money supply continues to be strong,'' said Aathira Prasad, an economist with DBS Group Holdings Ltd. in Singapore.

Inflation represents a key concern and the Reserve Bank of India could take all policy tools to contain it, deputy governor Rakesh Mohan said in Mumbai. Inflation accelerated to 6.58 per cent in the week ended January 27.

In its policy review on Jan. 31, the central bank also told banks to double provisions on lending for real estate purchases, credit cards, and personal loans and investments.

Consumer loan growth may slow to 20 per cent to 25 per cent this year, from 35 to 40 per cent in the past five years compounded, Vaidyanathan said.

"Lending rates have now risen to a level where it's beginning to hurt individuals,'' said U.P. Bhat, who helps manage Rs 28 billion of assets at Canbank Mutual Fund in Mumbai. "It may not hurt GDP growth as yet because companies are still reporting strong profits.''

Still, ICICI could find new opportunities from companies and fee-based and third party distribution of insurance and mutual fund products, even if loans to consumers slow, he said.

Individuals have been borrowing more to purchase houses, cars and other durables as average salaries have doubled in the past decade, government data show.

Salaries in India rose 13.8 per cent in 2006, the fastest in the Asia Pacific region, and may rise 15 percent this year, according to Hewitt Associates Inc., a human resources company based in Lincolnshire, Illinois.

Bank loans expanded at about 30 per cent in the past year as of January 26, according to central bank data.

Loans grew an average 35 per cent each of the previous two financial years, while growth in the $854 billion economy has averaged 8.3 per cent a year since 2003 and expanded 9 per cent last year. China, the world's fastest-growing major economy, expanded 10.4 per cent in 2006.

Annual growth of as much as 9 percent in the medium term is a reasonable estimate, Rajesh Mohan, the central bank's deputy governor, said today.