Change in MPC’s narrative is closer to reality

Change in MPC’s narrative is closer to reality: https://www.thehindubusinessline.com/money-and-banking/change-in-mpcs-narrative-is-closer-to-reality/article66234534.ece

Supportive steps

As a much-needed assurance, the RBI said it would inject liquidity in the system as and when required. The repo rate has increased by 225 bps from May 2022 to now. At 6.25 per cent, this is a comfort rate which India has flirted with three times between October 2016 and February 2019. As against the hikes, weighted average lending rates (WALR) on fresh and outstanding rupee loans have increased by 117 bps and 63 bps, respectively, between May and October 2022.

Weighted average domestic term deposit rate on fresh and outstanding deposits increased by 150 bps and 46 basis point during this period. This is contrary to perception that lending rates have increased faster than deposits especially on fresh business, but it also implies is that banks are already walking a very narrow bandwidth on availability of money and maintaining profitability.

While it is not reflecting on their net interest margin (NIM) in a broad-based manner yet, it’s a matter of time that the pain catches up. To partly mitigate the impact on the financials, the RBI has given banks a wide relaxation by extending the dispensation of enhanced held to maturity (HTM) limit of 23 per cent up to March 31, 2024. This will curtail treasury losses.

While it is not reflecting on their net interest margin (NIM) in a broad-based manner yet, it’s a matter of time that the pain catches up. To partly mitigate the impact on the financials, the RBI has given banks a wide relaxation by extending the dispensation of enhanced held to maturity (HTM) limit of 23 per cent up to March 31, 2024. This will curtail treasury losses.

Despite inflation cooling off a bit, at over 6 per cent, its far from comfortable and the central bank is steadfast to bring the number to the tolerable 4-6 per cent range. Clearly, there will be more rate hikes, and we may be heading to the 2015 levels of 7 per cent repo rate, though not higher.

The question is whether borrowers, especially on the retail side, can afford 300 bps hike in their loan repayments in just a year. Corporate borrowers are on the fence amidst global uncertainties and talks of a recession. To expect massive demand from them other than working capital drawdowns could be a tall ask. Therefore, going by the WALR trajectory, banks may have to start absorbing more rate increases in order to maintain growth.

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