The six-member Monetary Policy Committee of the Reserve Bank of India (RBI) surprised everyone in April 2023 as it took a pause on a series of hikes in the policy rate. For the second time too, in June’s MPC meeting, the central bank kept the rates on hold while maintaining the stance of withdrawal of accommodation.
Since the April policy, retail inflation or the consumer price index-based inflation (CPI) has eased further declining to an 18-month low of 4.7 per cent in April from 5.7 per cent in March.
It remained under the RBI’s comfort zone of 2-6 per cent for two consecutive months.
India’s gross domestic product (GDP) expanded at 6.1 per cent January-March 2023 quarter, pushing up the growth estimate for the full year (2022-23) to 7.2 per cent.
Considering the ease in inflation and strong GDP growth, RBI maintained the status quo in the June policy as well.
“The last two consecutive pause on monetary policy by the MPC was on account of two key factors. One, projection of FY24 CPI inflation within the target band, i.e., closer to 5% provided relief to MPC members. Two, the MPC wanted to assess the lagged impact of aggressive rate hikes done during FY23 before taking further action,” said Vivek Kumar, Economist, QuantEco.
“The inflation scenario has undergone a change since then. Record jump in vegetable prices in last 2-months, along with evidence of price pressure in pulses, spices, cereals, and milk will prompt the RBI to revise up its FY24 inflation forecast by 30-40 bps. The MPC also needs to be watchful of recent firming up of international commodity prices, which run the risk of some pass through to domestic prices, esp. if RBI chooses to maintain its above consensus GDP growth projection of 6.5%, he added.
Madhavi Arora, Economist Emkay Global said the sharp sequential uptick in food-led (specifically perishables) inflation could continue till August/September, implying that pressure on the headline print will stay and 2QFY24 may exceed the 6 per cent average.
“We raise our FY24 inflation forecast to 5.3-5.4 per cent from 4.8 per cent earlier, after adjusting for higher-than-expected June inflation, and tracking higher prints in the next couple of months. The food inflation shock will likely reverse meaningfully from Oct/Nov, leading to easing inflation in 4QFY24,” she said.
The pause impact
As a result of the pauses, external benchmark lending rates (EBLR) remained stable providing some relief to borrowers as their equated monthly instalments (EMIs) also remained unchanged.
Most lenders also did not increase the fixed deposit rates. The decision to hold deposit rates at the current levels will be driven by surplus liquidity in the banking system due to improvement in low-cost current account and savings account (CASA) balance following the deposit of Rs 2000 banknotes.
The RBI cannot do much to influence food supply management, but this adds pressure to stay vigilant on domestic dynamics. Global externalities have already pressed the MPC to signal wait-and-watch guidance, and the transient food spike will only complicate its reaction function, Arora said.
Bank credit and deposit growth
In June, bank loans advanced 16.3 per cent in aggregate terms with retail loans climbing more than a fifth on year, supported mainly by home and vehicle loans.
As per the central bank data, bank loans to non-bank lenders climbed, and so did the disbursements to large companies.
“The rapid pace of personal (retail) loan growth (both housing and non-housing) has been supporting overall credit expansion,” said an RBI report.
“Accordingly, the share of personal loans in total bank credit has surged to 28 per cent in 2022-23 from 21 per cent in 2017-18,” it added.
Loans to industries rose 8.1 per cent in June as compared with 9.5 per cent in June last year. But loans to large firms climbed almost at double the pace of last year – at 6.4 per cent versus 3.2 per cent.
Plateauing interest rates prompted banks, especially state-owned ones, to step up certificate of deposit (CD) issuances for mopping up funds.
Banks are more inclined to pay higher interest rates for shorter period on CDs to mobilise resources vis-a-vis paying higher interest for longer period on fixed deposits (FDs).
In July itself, banks raised three-month CDs at 6.90-6.95 per cent, hoping they can roll over the funds on maturity at slightly lower rates in case the MPC continues to stay on hold.
