Lack of demand for credit may push down interest rates

MUMBAI: Bank credit increased by nearly Rs 1.7 lakh crore during the current financial year up to January 20, 2017, as compared to a more than Rs 11-lakh-crore increase in deposits. This huge gap in growth of banks’ resources, even as demand remains tepid, points to further reduction in interest rates.

The gap of nearly Rs 10 lakh crore between the growth of deposits and loans will no doubt shrink in the remaining nine weeks of the year as withdrawals gather pace. But banks say that they will still run an asset-liability mismatch until early next year, which will prompt interest rate reductions despite higher oil prices putting pressure on inflation. Most economists expect the RBI to cut rates by 25 basis points (100bps = 1 percentage point) when the monetary policy committee meets next week on Tuesday.

Data released by the RBI on Friday shows that outstanding loans with banks as on January 20 at Rs 74,177 crore are lower than their loan book position as of end-September. On September 30, outstanding bank loans touched an all-time high of nearly Rs 75 lakh crore. However, in subsequent weeks, borrowers have been repaying loans. Deposits, which touched a peak of around Rs 1.06 lakh crore, continued to shrink and total deposits with banks dropped to Rs 105 lakh crore as on January 20 as the pace of remonetisation picked up.

The two weeks ended January 20 was the first fortnight after the demonetisation exercise came to a close. As customers withdrew money they had turned in, deposits dropped by Rs 88,861 crore. The same fortnight in 2016 had seen bank deposits shrink by only Rs 7,599 crore. Earlier this week, the central bank had released information on sector-wise deployment of bank credit up to December 23, 2016. In FY2017, the period up to December 23 saw credit to industry shrink by Rs 1.5 lakh crore. However, outstanding credit remained flat thanks to a Rs 1.16-lakh-crore growth in personal loans and Rs 38,000 crore growth in credit to services. Almost half of the personal loan growth came from home loans with mortgage books of banks growing by Rs 73,000 crore during the year.

“We expect the RBI to deliver a 25-bp repo rate cut on February 8, given continued fiscal consolidation and likely undershooting of its near-term inflation target. However, with global factors turning adverse — higher oil prices, narrowing interest rate differentials — this is a close call,” said Sonal Varma, economist with Nomura.

According to Pranjul Bhandari, chief economist, HSBC India, rising commodity prices is reducing the scope for rate cuts. “With oil on the climb, pressures from higher government wages, and Fed rates expected to rise, the space for rate cuts is quickly dwindling. We expect one final 25-bp rate cut in the cycle”.

Credits ET Realty

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