See potential in India; growth to improve after small dip: NDB

There is a lot of potential in India and its growth will imrpove after a small dip after demonetisation, says KV Kamath, President, New Development Bank.In the current conditions, lower interest rates will turn out to be very positive for India. If bond yields drop by even a percent, it may lead to profits of more than Rs 150,000 crore for the banking system. This could help them transfer these profits by reducing lending rates and help the economy make a come back. He sees the Reserve Bank of India dropping rates by one percent in the near future.Below is the verbatim transcript of KV Kamath’s interview to Shereen Bhan on CNBC-TV18. Q: It is all about China, Xi Jinping was here and he wants to know be the sort of advocate for globalisation and free trade. What is your own sense of the reception that he got and the China’s story? A: He got a great reception and for a reason because the rest of the world leaders, look at Europe or Asia are looking to see who will fill in a way the vacuum that America at times says it wants to leave in the global economic context. So, clearly, China is stepping into that space and the people are listening. Q: You have always been a bull on India, people have downgraded the growth forecast for India including the IMF very recently. What do you make of the downgrades that have come in? A: It is too early in the day to actually talk of gross domestic product (GDP) slowing down and so on because we need to understand where this will stabilise. We have not seen any degree of clarity on that. For example, what will be the impact on inflation of the move that has been done? What will be the impact on interest rates? Thirdly, what will be the lending appetite that the banks are going to have going forward with the lower interest rate climate and cleaner I would say structure in terms of the market place? I would think all this should be positive, so I am a little bit surprised why this is negative. For it to be positive there are certain pre conditions that we need look at. A- we need to make sure that interest rates do go down so that you have infrastructure spending and consumption come up. Q: How much do you see interest rates going down by? A: I can’t see how it will not go down by a percentage point. As I see it at this point in time given the liquidity in the system and stabilisation exercise the Reserve Bank of India (RBI) is carrying out interest rates are being held in place. Now if there is any change to the stabilisation exercise you will have a pressure on interest rates go down. If truly inflation, consumer price go down as everybody expects then there is even more pressure for the bonds yield to drop. So, to me these combination of steps are good to the banks because which is A- if bond yields go down they are treasury profit and that should actually put their worst behind, worst for incremental capital could be out. Just to put a number in context a 1 percent drop in the yields of government bonds would mean a profit of about Rs 1,50,000 crore for the Indian banking system. That is more or less your problem solved. Then let us say 1 percent lending rates come down the consumer is going to come roaring back. So I look for that day and after that has happened or not happened I would like to take a call whether economy will go up or down. As of now I would think I don’t see any clarity that the growth rate should go down, but I see lot of potential in fact the growth rate should go up after a small probably dip.