Moneycontrol Pro Panorama | The many worries of Shaktikanta Das ahead of MPC December meet

The RBI is keeping a close watch on the microloan market after cracking down on the unsecured personal loan market in November 2023.

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Over the past few days, a combination of factors has been playing out that has essentially pushed the overall liquidity in the banking system to a deficit mode, albeit temporarily.

The Indian rupee is continuously losing to the greenback, foreign funds are seeking greener pastures as valuation worries are piling up in emerging markets and government spending seems to have lost momentum. All this has put the central bank in damage control mode. The Reserve Bank of India (RBI) has announced a series of variable repo rate auctions (VRR) to temporarily inject liquidity into the banking system.

In the latest, around Rs 1 lakh crore have been pumped in through these channels. Liquidity in the banking system started falling into deficit from November 19, when it was in a surplus of around Rs 1.04 lakh crore and went into a deficit of Rs 30,848.24 crore on November 27.

Bond traders are speculating that the reason is, RBI likely selling US dollars to save a falling rupee amid large FPI outflows. None of this is news to Indian markets though. For a while, foreign investors have been on a selling spree due to high domestic stock valuations, the China factor, and a strengthening US dollar as well as Treasury yields. There is an air of uncertainty around in the markets.

Call rates move up

How does tight liquidity impact rates? If it persists for a while, interest rates across instruments will start to move up. Already, the weighted average call money rate, which is an overnight rate at which banks lend to each other, has moved up above the RBI’s repo rate in the past two weeks after the liquidity in the banking system fell into deficit.

According to the RBI data, in the past two weeks, the weighted average call money rate traded in the range of 6.62 percent to 6.73 percent. The repo rate stands at 6.50 percent. The movement in the overnight call money rate is significant because other short-term debt instruments such as treasury bills, commercial papers, and certificates of deposit rates get adjusted accordingly. The rise in call money rates also impacted the cut-off yield on treasury bills in the primary market. The cut-off yield during auctions increased by 2-4 basis points across tenures, traders say.

The many worries of MPC

Against this backdrop, the monetary policy committee (MPC), which is set to convene next week to review the policy rates, has a lot more to worry about beyond interest rates.

Nothing dramatic is going to happen on the rate front next week. The consensus among economists is that the MPC is expected to take a cautious view on interest rates, considering the jump in retail inflation in October. It could wait for another more suitable day for a rate cut. Or, at best, the MPC could start with a token rate cut signalling its intent.

But that won’t be an easy decision. There is a growing chorus for rate cuts from none other than the government’s top ministers. Some economists seem to view the inflation problem as largely under control and a demand push is overdue. The growth scenario is not as rosy as it appears from a distance. Looking closer, there are areas of pain emerging in the rural economy, particularly in the small loan space. Microloan delinquencies are rising.

Not surprisingly, Goldman Sachs has downgraded shares of CreditAccess Grameen citing developing asset quality worries. Between the fourth quarter of financial year 2024 and the September quarter of financial year 2025, CreditAccess Grameen's gross NPA increased by 97.6 percent while its net NPA more than doubled, increasing by 107.5 percent.

For the September quarter, CreditAccess Grameen's Gross NPA stood at 2.44 percent from 1.46 percent in June.

Rightly, the RBI had recently acted on certain NBFC-MFIs for unhealthy credit practices and borrower overleveraging. The RBI is keeping a close watch on the microloan market after cracking down on the unsecured personal loan market in November 2023.

Post the RBI’s actions, the unsecured loan growth has slowed, and banks have begun to step up lending to industries across the board, according to the latest data. But contracting loans at high interest rates could impact the ability of smaller firms for timely repayment in the years ahead.

In a tight liquidity environment, banks will hesitate to put the money on the table for low-rated firms which will have to then turn to smaller lenders to borrow at higher rates. But that may not end too well if the economy is not growing at a desired pace.

Moving on, you may want to take a look at this FT piece by Tim Bradshaw who writes that Nvidia and the AI boom face a scaling problem. The piece argues that the idea that putting more data into a bigger model will deliver smarter systems is starting to break down.

Also, I’m reading this piece by colleague Aparna Iyer on the rising stress in the loan books of India’s shadow banks, which is a key area of concern for the RBI Governor Shaktikanta Das and his colleagues on Mint Road. The bottomline is we had too many things on the news plate this week. Among these, what will make the bigger headlines next week?

I’ll keep my fingers crossed!

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Dinesh Unnikrishnan
Moneycontrol Pro