The CEO and managing director of ICICI Bank has his finger on the pulse of the economy and today he's clearly concerned about high interest rates. In this conversation with Shobhana Subramanian, K V Kamath points out that if interest rates continue to linger at these levels for another six months growth will definitely slow down. Excerpts:
Is there a change of mood in Indian industry?
I would think industry is clearly getting a little bit cautious though no one is acknowledging that the mood has changed. We won't see any immediate shrinkage in the pipeline of investments but clearly people are reassessing their options. One is overall growth, whether it will stay where it is and the demand consequent to a change in growth.
Is it more because of the global environment or our own domestic situation?
Our entrepreneurs are more concerned about the domestic end, particularly the domestic interest rate scenario. High interest rates are worrying their customers; customers are worried about their ability to meet their obligations at these higher levels. And if the customer doesn't buy, demand goes down and that affects the manufacturer.
But the strong growth is supposed to have pushed up wages and increased affordability?
If you have a 30 per cent increase in interest rates in one year and the basket of expectations of consumers is large, you have a situation where maybe there's a challenge in meeting one aspiration or another. So you drop going after something that you wanted, maybe you don't buy that car now, things to put in the home, or maybe you don't buy that home now. As far as the mortgage market is concerned, there's also the issue of high asset prices but in other segments such as cars where asset prices have remained stable, we're seeing the same trend there also.
So, higher interest rates have impacted demand?
Oh indeed, there's a clearly an issue of affordability. The lay consumer cannot afford today what he could have afforded a year back. That demand is tapering off is very clear. If we look at mortgages, the actual number of units sold year-on-year would have fallen off by about 20 per cent. So the number of loans would have fallen. In all other areas, demand is flat, whether it's transportation or durables.
How do you see the growth in credit by banks this year?
On the retail front there will be modest growth; where we were earlier talking of 25-30 per cent we will be talking of a low double-digit growth of 10-15 per cent. This will have an impact on corporate growth. Corporate growth was gearing up to meet this demand so that's where I see a degree of caution. If that demand timeline is lost, then do I need to invest today? This is the sort of thought that is there now. We have not seen any projects being pushed from the front burner to the back burner, at least anecdotally no one has come and talked to me about it. But if interest rates remain where they are, I wouldn't rule that out. That will clearly impact the overall growth numbers that we are looking at.
Where do you think interest rates are headed?
We thought interest rates had peaked and should have started tapering down but that has clearly not happened. I think the signalling by the monetary policy of raising the CRR sent a message; that message was maybe that interest rates will not taper. I guess it's again a wait-and-watch attitude that's being played out by everybody, whether it's the borrower, the lay person who has this pressure on him and I'm sure the manufacturing and infrastructure sectors are also watching.
If interest rates remain at these levels for another six months, do you think credit could slow down?
Overall credit offtake has slowed down marginally from the highs of last year, but it has not come down to a level where you could say it is impacting growth. But at these rates or if the signal is that they will stay there, then definitely there should be a negative impact.
So, if interest rates don't come down in another six months, do you think GDP growth could slow to below 8 per cent?
I have not done my arithmetic on that but I would say that your assessment could be right.
And if the assessment is right, then will you be able to speed up the engine of growth again to what is now an aspirational number of 10 per cent? And if so, over what time? Would you say then that it's better to bring down interest rates to fuel growth rather than keep them high and let growth be stymied?
That is something policymakers have to decide. All I'm saying is that the consequence of having a high interest rate environment clearly is that it would have a salutary impact on inflation. But on the other hand, it would have an impact on growth, so balancing this would be critically important for the country.
How will the global situation impact Indian companies?
Global liquidity has not shrunk and neither has domestic liquidity, for that matter. Liquidity is good at the appropriate pricing levels. In the global context, risk is being re-priced. So someone with perceived bad credit will not get money. We're not seeing any issues in the syndication market, but companies are paying more. The appetite for Indian paper is positive; as a nation we are not heavy borrowers.
Indian companies' earnings remain robust, so don't you think Indian markets should continue to attract global money?
Indeed, but a couple of points need to be made. If interest rates do not come off from current levels, whether growth will stay where it is, is a question mark. If growth doesn't stay where it is, will Indian company profitability stay where it is, is another question mark which investors will look into. Third, if there is a fairly significant amount of hedge fund money into India, if that gets unwound, will there be inflow from other investors to take up the slack? We will see it play out over the next six to 12 weeks. Our hope is that we will see a soft landing. As a country we are clearly better positioned than most others because we do not feel the direct impact of these events, it is an indirect impact.
So, are you more worried today than you were six months back?
Yes, I am more worried today. As a banker I get worried when I see interest rates going up rather than in the other direction. I will be worried if I see an economic slowdown, because that impacts my customers. But as of now, these are not worries that could give me sleepless nights. Delinquencies are at levels that we have forecast, or below those numbers especially in areas like mortgages. If there is a slowdown it would impact us only 12-24 months down the line and if there are corrections in the medium term, we'll be fine.
Has the overheating in the economy been cooled?
Yes, it certainly has and the credit has to be given to the policymakers. The challenge now is to get comfort that it has cooled enough. The real estate market though needs some more cooling.
