The decision of the Monetary Policy Committee (MPC) to maintain status quo on the repo rate, while changing its policy stance to “neutral”, was in line with expectations.
While the growth and inflation forecasts for FY25 were retained at 7.2 per cent and 4.5 per cent, respectively, there were minor downward revision in these rates for Q2 FY25. The growth estimates were revised downwards because of heavy rain in certain parts of the country, which impacted the output of certain industries.
However, the favourable base contributed to the revision in the inflation estimates. With good monsoons, the outlook on food inflation is somewhat brighter, even as agro-climatic risks persist.
Lower funding cost
With the change in policy stance, the yield on the new 10-year benchmark security declined by 5 basis points (bps) to 6.75 per cent. Hopes have been raised that if inflation continues to be as per the MPC’s expectation, a 25-bps rate cut can be expected in the near future.
If the spending on private consumption during the festive season is weak, which can potentially impact the GDP growth, the MPC may be inclined towards a rate cut, as early as the next meeting. This shall translate into a lower borrowing rate for retail borrowers as well as larger corporates.
While positive for the borrowers, the mismatch between credit and deposit growth would mean that the deposit rates for banks could stay elevated despite a potential cut in the repo rate, which could mean further pressure on interest margins of the banks.
This could also drive a slower growth in bank credit as banks maybe reluctant to mobilise deposits at higher rates.
Warning for NBFCs
For the first time in many years, the RBI has used the monetary policy statements for sounding out practices of some of the NBFCs operating in microfinance and housing finance sectors. While we have seen the regulator take actions on banks and NBFCs over the last few years on various business practices, the tone of the statement suggests that that the NBFCs need to act faster.
With a belief that the risk controls are not keeping pace with the business growth, the RBI has sounded caution to NBFCs that have been chasing high growth in the recent past. Further, given the confidence-sensitive nature of the NBFC industry, which has implications for financial stability, the central bank’s proactive steps to curb excessive exuberance appears justified. Given the wider purpose for credit inclusion served by MFIs and HFCs, a general tightening of guidelines for the sector isn’t expected.
However, there could be more regulatory scrutiny around the business models and risk practices of specific NBFCs.
While the RBI has acknowledged the role of NBFC in improving financial inclusion, customer’s interest remains a key focus area of the regulator. The proposal to remove pre-payment/foreclosure charges on floating rate loans for micro and small enterprises is positive for the consumer.
Unsecured loans
The regulator has been vocal about the emerging risks in certain loan segments. These include unsecured personal loans for consumption purpose, micro-finance loans and credit cards.
Some lenders recently reported worsening asset quality in these segments, citing over-leveraging by the borrowers, driven by ease of credit availability.
While the growth in these segments has slowed, the RBI has nudged lenders to tighten their underwriting norms and post-sanction monitoring.
These measures are aimed at proactively managing the emerging risks; the credit flow to these segments would moderate. This is line with ICRA’s expectation of a moderation in credit growth to 11.7-12.5 per cent in the current fiscal.
The writer is Senior Vice President & Group Head – Financial Sector Ratings, ICRA