A moderation in inflation during the next 2-3 months could trigger a big reduction

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in interest rates by around one percentage point in the near-term, state-run lender Union Bank of India said today.

"There is every possibility of a decline in interest rates if inflation by March is at around 6-7 per cent. The trigger would be the RBI's policy statement (later this month)," Union Bank Chairman and Managing Director M V Nair told reporters here.

"Unless some major event takes place, interest rates should come down by at least 100 basis points," he said.

His comments came after food inflation plunged into the negative zone in the week ended December 24, declining by 3.36 per cent.

Experts, including Prime Minister's Economic Advisory Council Chairman C Rangarajan, have said the decline in food inflation will bring down headline inflation to below 7 per cent by March.

"When interest rates are high, asset quality gets affected, which is not good," Nair said.

The RBI has hiked interest rates 13 times since March, 2010, to tame demand and curb inflation. The base rate of commercial banks, according to RBI data, ranges from 10 per cent to 10.75 per cent.

Nair also expressed concern about the sharp depreciation in the rupee, which weakened by over 15 per cent against the US dollar during 2011.

"The rupee depreciation will definitely impact the asset quality of banks," he said.

The Union Bank chief, however, said the non-performing assets situation of his bank is likely to improve from the next quarter, though he did not give any figures.

The bank expects credit growth to be around 16 per cent by March-end.

"We expect our net interest margin to be 3.20 per cent by March-end," he said.

During the first half (April-September) of 2011-12, Union Bank's net interest margin stood at 3.14 per cent.