Banking Central| RBI’s MPC meet: Time to nudge growth, again?

Will Sanjay Malhotra deliver a surprise rate cut today?

This is an important week for Indian banks. Beginning August 4, the Reserve Bank of India’s monetary policy committee (MPC) begins its three-day meet against a backdrop of worrying economic signals.

Bank credit growth to industry has slumped to a tepid 5.5 percent in June, which suggests that either demand is slowing or the money is still expensive for a large set of borrowers.

This slowdown, coupled with a broader sluggishness in credit offtake, will weigh on the MPC decisions, which it will  share on August 6. The rate-setting panel cannot ignore the growth part, especially when there are fresh global headwinds and risks to growth.

Let us look at some numbers to see what is at play. Scheduled Commercial Banks (SCBs) clocked a modest 8.9 percent year-on-year rise in net advances in the fiscal first quarter, CareEdge Ratings has said.

Within this, public sector banks (PSBs) outpaced their private counterparts, growing advances at 11 percent compared to 8.1 percent for private banks, largely driven by priority sector lending. But this growth pales when set against deposits, which surged by a healthier 11 percent. Due to slowing credit growth, the credit-deposit (CD) ratio slid to 78.9 percent, 40 basis points down from the year-ago period, reflecting a system awash with funds but struggling to find takers.

The decline in the CD ratio points to another trend —corporates and industries are borrowing less, either because demand is tepid or because high borrowing costs are biting.

The net interest margin (NIM) for banks, a key gauge of profitability, shrank by 18 basis points to 3.24  percent in Q1, as lending rate cuts outpaced deposit repricing and high-yield segments such like non-banking finance companies (NBFCs) and unsecured personal loans saw reduced offtake.

Banks are lending cautiously and borrowers are shying away. The CASA ratio, too, dipped to 37.3 percent from 38.5 percent a year ago, hinting at depositors moving towards higher-yielding options, further squeezing banks’ margins.

For governor Sanjay Malhotra-led MPC, this data is a clarion call. Inflation, while still a concern, has shown signs of easing.

The RBI has long walked a tightrope between taming inflation and supporting growth but with liquidity tightening and credit growth faltering, the case for a rate cut is stronger than ever. Probably, a 25 basis- point reduction in the repo rate could ease borrowing costs, spur corporate investment and signal to markets that the RBI is serious about reviving growth momentum.

(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)