Page 41 - Banking Finance October 2024

ARTICLE

of private and foreign banks in EBLR linked loans is in the rising" and the same turned true as retail inflation
higher (figure 4 as on Dec 2023 RBI data) which could rose substantially. The CPI index from January 2022 to
be on account of higher interest rate discounts offered September 2022 stood around 7%. The core inflation (it
by foreign and private banks during Covid period to excludes food and fuel inflation) consistently stayed above
migrate their customers from MCLR to EBLR. 6 per cent for almost every month between May 2021 to
March 2023. MPC started increasing policy rates from
The transmission of policy interest rates in the current May 2022 and till April 2023 the repo rate was increased
tightening cycle, has been effective for both deposit and by 250 basis points and then paused.
credit market. This sets the tone for bringing in the right
balance in spending by consumer and businesses. The The long pause of policy rate at 6.50% since April 2023
change in deposit and lending rates for SCB's on account and RBI's emphasis on draining out liquidity from the
of monetary tightening since April 2023 to March 2024 system in accordance with its stance of "withdrawal of
as per RBI data is as follows: accommodation" has to a large extent improved the anti-
inflation credibility of monetary policy and the central
Sl. Weighted Average Weighted Average bank. These steps have helped to break the vicious circle
No Term deposit rates Lending rates of wage-price spiral which results into transmission of
Fresh Outstanding Fresh Outstanding inflationary pressures rising from higher food inflation to
Deposits Deposits Loans Loans rise in core inflation. There has been continuous decline
in core inflation since January 2023, which as on March
01 +259 bps +185 bps +186 bps +111 bps
2024 hovers around record low levels of 3.50%.

It was also observed from the data that transmission of
As economic growth of our country is not showing any
hikes in repo rates to deposit and advances has been
adverse signs on account of current policy rates, so we
done more efficiently by PSB's in comparison to Private feel that RBI is unlikely cut policy rates in a hurry. In a
and Foreign Banks. post policy press conference in April 2024, the Governor
indicated that India's potential growth has likely risen
Decline in rate of growth in deposits and advances is a
given 8% GDP growth over the last three years. This
tool to measure the effectiveness of monetary policy
indicates that neutral real rates have risen, providing
tightening which should finally result in fall in aggregate
policy space to remain on pause, for further clarity on
demand. The credit demand showed signs of decline till
food inflation risks and Fed policy.
March,2023. However, from April 2023 credit growth
started to rise as MPC took a pause on the policy repo
f) Impact on Economic Growth:
rate which gave an indication that interest rates have
The monetary policy tightening both globally and
peaked and could decline in near future. This was coupled
domestically had a considerable impact on India's
with economic growth and tight liquidity position in the
economy, as it clearly highlighted that the prime objective
market which augured well for revival in credit demand.
was of price stability compared to output stability. India's
Growth in deposit remains subdued which is consistent with
GDP growth declined from 9.7% in FY22 to 7% in FY
the stance and tight monetary policy implemented by MPC.
23, primarily on account of slowdown in Private Final
e) Inflation: consumption expenditure (PFCE), Government Final
During the last three years, India witnessed high and Consumption Expenditure (GFCE), and Exports in goods
stubborn inflation. The WPI inflation averaged around 13 and services. However, GDP is expected to recover to
per cent between April 2021 to September 2022. The level 7.6% in FY 2023-24, supported by buoyancy in Gross
being highest in over a decade, primarily on account of Fixed Capital Formation (GFC).
lifting of Covid restrictions leading to opening of economies
and Russia-Ukraine war. It has been historically observed The quarterly released national income data more clearly
that spikes in wholesale prices normally indicate "inflation highlights the lagged effect of tight monetary policy

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