The Reserve Bank (RBI) is unlikely to cut interest rates at its upcoming monetary policy review meeting, said a report by the State Bank of India. This is because “India’s growth is overshooting its potential output”, it explained.
The SBI report highlights that domestic economic conditions remain the most important factor in the RBI’s decision-making. As growth remains robust and above the long-term potential, the case for a pause is compelling. “Domestic conditions are paramount and with robust growth higher than potential output, the case of pause exists,” the report said.
However, the RBI might decouple its interest rate moves from happenings in the U.S. and take an independent decision based on the growing domestic economic situation. According to the report, although global factors U.S. interest rates used to have a bearing on financial markets, the RBI would be more keen on local economic conditions.
It also reports on the relationship of credit and deposits in India’s banking system. It comments that strong credit growth is what drives deposit growth. If credit demand decreases, this will result in a reduction in deposits in the future. Strong deposit growth is possible only through sustaining strong credit growth levels.
Investment cycles also play an important role in this play. For businesses and industries to grow, credits must be needed and demand for credit is applied. Thereby increasing deposits as more money flows into the banking system. As the report said, “In other words, credit granger causes deposits; hence a decline in credit will lead to a decline in deposits going forward”.
A strong investment cycle is imperative for maintaining healthy credit and deposit growth in the banking system. Although there were some expectations that the RBI might cut rates considering the global developments. The SBI report estimates that strong domestic growth and sustained credit growth might make the central bank keep rates steady near-term.
On the whole, the approach appears to be keeping the momentum of the Indian economy on track. While at the same time, it is committed to delinking its monetary policy from global factors. The way the RBI follows this approach will ensure a continuous growth pattern in the Indian economy.
ANI
