Bank credit in India will keep growing at a steady pace, despite rising interest rates, as the country's economy continues to recover from the COVID-19 pandemic.
The Reserve Bank of India, or RBI, raised its repurchase agreement rate by 50 basis points to 5.90% on Sept. 30. This was the fourth such move this year as the central bank maintains focus on "withdrawal of accommodation" to check inflation without derailing economic growth, according to a monetary policy statement. The decision on the quantum of increase in the benchmark overnight lending rate was not unanimous, as one member of the rate-setting panel favored a 35-bps hike.
"We expect overall [credit] growth to remain steady, led by continued traction in [the] retail and [medium- and small-scale enterprises] segment, while [capital expenditure] recovery still appears sometime away," said Nitin Aggarwal, a research analyst at India-based Motilal Oswal Securities Ltd.
The RBI noted that banks' credit growth had accelerated in tandem with improving economic activity. Growth in nonfood bank credit rose to 16.7% year over year as of Sept. 9, 2022, from 9.7% as of March-end 2022. Retail loans remained the major driver of overall credit growth. Within retail loans, growth in housing loans stood at 16.4% in August 2022 compared with 11.6% a year ago, the central bank said.
Indian banks have raised their deposit and lending rates in the first half of the fiscal year in tandem with the rate increases.
The Indian central bank will seek to balance the need to bring inflation to within its comfort zone of a range between 2.0% and 6.0% and to ensure that monetary policy does not choke economic recovery. Real gross domestic product grew by 13.5% in the April-to-June quarter, compared to 20.1% in the year-ago quarter, according to data from the Ministry of Statistics and Programme Implementation.
Inflation eased to 7% during May-June but remained above the RBI's upper tolerance threshold of 6%, in part due to high global crude oil prices as the Russia-Ukraine conflict continues to create uncertainties. The RBI said it downgraded its GDP growth projection for the fiscal year ending March 2023 by 60 bps to 7.2%. Meanwhile, the central bank raised its inflation forecast for the fiscal year by 120 bps to 5.7%.
"The RBI didn't sound more hawkish unlike the commentaries we are hearing from global central banks," Aggarwal said, noting that inflation in India was still lower than the rates seen in several developed countries such as the U.K., where the Consumer Price Index, including owner occupiers' housing costs, rose by 8.6% in the 12 months to August 2022, down from 8.8% in July.
Rate hikes on the horizon
Analysts said they expect more rate hikes from the RBI to follow, but the pace may ease.
Motilal Oswal is predicting a terminal rate in the current tightening policy cycle of 6.5%, while global financial services group Nomura predicts the hikes to remain data-dependent. The Japan-headquartered brokerage raised its terminal repo rate forecast to 6.50% from 6.15% previously, with a 35-bps hike in December and a final 25-bps hike in February 2023.
"Overall, this policy outturn was broadly as expected, but the dovish dissent suggests that views among the MPC members are starting to diverge," Nomura analysts Sonal Varma, Aurodeep Nandi and Nathan Sribalasundaram wrote in a note after the RBI policy announcement.
While the RBI's policy stance indicates that further rate hikes and a further withdrawal of liquidity are likely, "we would not read too much into it," the analysts said. The key message from the RBI is that the policy will be data dependent and not guided by a textbook approach amid increased uncertainty, they added.
