The decision of RBI’s Monetary Policy Committee (MPC) to maintain status quo on the repo rate, while retaining its policy stance of “withdrawal of accommodation”, was in line with expectations.
The MPC also retained its inflation and growth forecasts for FY25 at 4.5 per cent and 7.2 per cent, respectively, with an increase in inflation estimates for Q2 FY25. On the inflation front, the MPC continued to highlight the benefits of historically low core inflation levels, while it also cited risk of elevated food inflation levels. Persistently high food inflation can un-anchor household inflation expectations, which can lead to a demand for higher wages and spillover to core inflation and, thereby, increase overall inflation pressures. Rather than simply taking a cue from advanced economies, the RBI is likely to remain watchful on the food inflation dynamics before embarking on rate cuts. Improved kharif sowing and water reservoir levels augur well for the outlook on food inflation. A shallow rate cut cycle in H2 FY25 is likely if the monsoon is favourable in the second half of the season.
With resumption of government spending, the liquidity in the banking system has returned to surplus after remaining in deficit since the beginning of the financial year. While the RBI did not announce any open market operations to durably suck out surplus liquidity, it reiterated its stance to maintain the overnight rates closer to the policy rate.
Emerging risks
While a status quo was expected on the rate front, from the financial stability standpoint, the RBI voiced its concerns on emerging risks. It highlighted the need for banks to focus more on retail deposits amid rising share of wholesale deposits to fund credit growth. Further, it flagged the continued high growth in certain consumption loans as well as increasing instances of top-up loans against collateralised loans being used for speculative purposes.
The central bank alerting lenders on calibrating underwriting norms and on closer monitoring of end-use of funds are steps in the right direction. Such loans not only raise over-leveraging concerns but also suspicion on the quality of such borrowers, as they may use such top-up loans to service existing loans. To provide better insights into the behaviour of retail customers amid concerns of over-leveraging, the RBI has proposed to increase the frequency of reporting credit information of their borrowers to credit information companies to fortnightly, from the current monthly, basis. Given the ease with which credit is available through digital processes, the credit profile of the borrowers can change quickly. Hence faster reporting by lenders to credit bureaus will help in improved decision-making by the lenders.
The writer is Senior Vice-President & Group Head–Financial Sector Ratings, ICRA