India has potential to grow at 7.5% or above, says RBI governor Das

Reserve Bank of India governor Shaktikanta Das

India has the potential to grow at 7.5 percent or more, Reserve Bank of India (RBI) governor Shaktikanta Das has said, which is a little above the central bank's full-year forecast for 2024 of 7.2 percent.

"I think India's potential growth today... is about seven-and-a-half-percent-plus," Das said at the Bretton Woods Committee's annual Future of Finance Forum on September 13. The forum was held in Singapore in partnership with Swiss bank UBS.

"This year, we expect at the end of the year to record 7.2 percent," the governor said, with slower growth in the first quarter mostly due to low government expenditure during the Lok Sabha election.

Das said India's merchandise export improvement was below expectation as external demand was not as robust as before, though services exports had picked up.

Das also suggested that interest rates were unlikely to be cut anytime soon and the central bank would have to stay the course. "Inflation has moderated from its peak of 7.8 percent in April 2022 into the tolerance band of +/- 2 per cent around the target of 4 percent but we still have a distance to cover and cannot afford to look the other way," Das said.

India’s inflation rose slightly to 3.65 percent in August from 3.6 percent in the previous month, as a favourable base from last year helped contain consumer inflation despite an uptick in food categories, data release on September 12 showed.

It was for the second successive month that the retail inflation stayed below the 4 percent mark and 12 months in a row that it was came in below the RBI's 6 percent threshold. .

The Reserve Bank’s projections indicate that inflation is likely to ease further from 5.4 percent in 2023-24 to 4.5 percent in 2024-25 and 4.1 percent in 2025-26, Das said.

Official figures Thursday showed inflation remained below 4% for a second month in August, although that was largely due to statistical reasons. The RBI held rates steady for the eighth consecutive time in August at 6.5 percent.

He also pointed out the stress in the global commercial real estate (CRE) sector, which needs to be watched closely. "Banks exhibit high sensitivity to expected and unexpected CRE losses, due to the relatively high CRE coverage ratios in their loan books. Further, liquidity squeezes can materialise for banks with large CRE exposures, as short sellers may target them and investor confidence may slip further."

Das said that staying alert and undertaking forward looking regulatory measures could contain the risks to bank balance sheets and systemic stability.

The governor also raised concerns over the four-fold growth of private credit over the last 10 years. Das said it has become a major source of corporate financing among middle-market firms that have low or negative earnings, high leverage, and lack high-quality collateral. "Proliferation of this asset class, along with intensifying competition with investment banks on larger deals, may shift supply-demand dynamics and result in poorer underwriting standards. As a consequence, the probability of credit losses can rise and make existing risk management models obsolete."

The rapid growth of private credit, their increasing interconnectedness with banks and NBFIs, and their opacity creates vulnerabilities that could become systemic. Regulators world over need to give a closer look to these developments and come out with necessary guardrails, he added.

The governor also said that the RBI doesn’t draw a line in the sand for the rupee and authorities only intervene in the foreign-exchange markets to curb volatility.

“Some sections of the market think that the Reserve Bank has got certain lines and that the Reserve Bank doesn’t allow the rupee to depreciate beyond that. I would like to say that it is not so,” Das said when asked about the ongoing currency stability. “We want a kind of orderly depreciation or an orderly appreciation. We do intervene in the market with this approach,” the governor said, adding India’s strong economic fundamentals are reflecting in the stable exchange rate.

With Bloomberg and Reuters input