With reducing liquidity, the transmission of rate hikes to market interest rates will increase in the coming months, according to CRISIL. This could take some steam off the strength in credit growth and hit growth by next year, opined the credit rating agency.
“The RBI’s rate hike of 190 basis points so far this fiscal year is yet to be completely transmitted to lending rates. The central bank is expected to keep monetary and liquidity conditions tight amid persisting elevated inflation,” said Dharmakirti Joshi, Chief Economist; Dipti Deshpande, Principal Economist; and Pankhuri Tandon, Economist, CRISIL, in a report on ‘Financial Conditions’.
Global factors
Global factors remain adverse, with a sharp rise in the US policy rate, a stronger dollar, and elevated crude oil prices, per the report. The US Federal Reserve’s policy rate is already at the post-2008 financial crisis high of 3.75–4.00 per cent in November.
“S&P Global expects the Fed rate to rise to 4.00–4.25 per cent by early 2023. The US dollar also benefits from its status as a safe-haven currency and the ongoing Russia–Ukraine conflict. A strong US dollar, along with elevated crude oil prices, will maintain pressure on the rupee… overall financial conditions in India are expected to tighten further with rising market interest rates and a weakening rupee,” said CRISIL economists.
Bank credit growth
CRISIL noted that bank credit growth rose to a decadal high of 17.9 per cent on-year in October, compared with 16.4 per cent the previous month. Benign lending rates, coupled with robust credit demand, are leading to a broad-based rise in credit growth. Services and personal loans are seeing the sharpest rise.
“Banking lending rate hikes gained momentum, with auto loan rates rising an average 43 bps on-month and home loan rates 42 bps on-month. Yet, the rates remained lower than their pre-pandemic 5-year average,” the agency said.