Page 42 - Banking Finance October 2024

ARTICLE

followed by an interest rate pause. The annualized quarterly to credit growth, which is negatively impacting the bank
GDP and GVA growth dipped from a high of 12.8% and NIM's. In the initial stages of tightening credit growth was
11.3% respectively in June quarter of FY23 to reach 4.3% decelerating, but with pause and expectation of cut in policy
and 4.8 % in the December quarter of the same year. This rate it has again gained momentum.
was followed by an economic revival from June quarter of
FY24 as both GDP and GVA growth rebounded to 8.4% RBI in a series of sudden and to front-load policy rate
and 6.5% respectively in December quarter of FY24. hiked it for a cumulative amount of 250bps from May
2022 to February 2023 and paused the rates thereafter.
Now the question arises that with economic growth expected The main objective behind this action was to eliminate
to be around 7% in FY25 with slowdown in global economy, inflationary expectations thereby preventing persistency
it implies that demand on domestic front is likely to remain in core inflation which was on account of consistent high
strong. So, if inflation is cooling off by slowing demand food and fuel inflation. The approach to increase rates
down on account of the current monetary policy, then next quickly and in large quantum adopted by majority of
year with declining demand how can GDP growth continue central banks was to send a clear signal to the public and
to be high? then how likely is that instead of declining, market that they are committed to rein in inflation back
inflation may rise again. It means that RBI is expecting that to the target at a quick pace. This helped central banks
the policy rate transmission is not yet complete, and it would to improve their credibility as an inflation fighter, which
take few months for it to work through various channels, increases their policy effectiveness.
which would result in decline in demand.
Our central banks tight monetary policy did impact the
Conclusion: economic parameters of inflation and growth, though with
a lag. Headline CPI and core inflation moderated to
Central banks across the globe are majorly continuing with
below 6% and as of March 2024, they are currently
their tight monetary policy stance to bring inflation back to
hovering at 4.85% and 3.50 % respectively. A significant
their respective targets. This act has also been complemented
role has been played by global monetary tightening in
by the Governments across the world by taking steps to ease
moderation of inflation in India, especially WPI inflation
the supply side pressure so as to arrest inflation arising from
which is currently at 0.53%. Our GDP growth also
high prices of commodities, food, and energy. Some of the
witnessed decline from 9.7% in FY22 to 7% in FY23,
major central banks such as Federal Reserve, ECB, BoE
but it is expected to improve to 7.6% in FY24.
have continued to pause their policy rates while indicating
rate cuts which would be data dependent. BoJ has also
Advanced economies such as UK, Euro zone are showing
abandoned its negative interest rate policy and first time in
signs of slowing economic growth as an after effect of
last 17 years has increased the policy rates from -0.1 to
sharp rise in the policy rates. However, inflation still
0.1% coupled with reduction in the amount of monthly
remains above the 2% target, and the last leg of
quantitative easing. This clearly indicates that even the
disinflation process is expected to be slow and prolonged.
Japanese central bank is on the path of hiking interest rate
However, US is the only developed economy which is
and quantitative tightening which marks a shift from its
experiencing sustained economic growth, adequate
decade long ultra -loose monetary policy.
employment generation and declining inflation. The
Interest rates on fresh rupee deposits rose by 259bps, in current economic data has increased the likelihood of a
comparison to rise in rates for fresh rupee loans in the tune soft landing coupled with mild recession in CY2024.
of 186bps. This clearly indicates that rate transmission to
deposit market has been higher relative to the credit market. References:
The introduction of EBLR has significantly improved the https://www.rbi.org.in
monetary transmission of rates in Indian banking industry https://www.business-standard.com
for loan pricing. However, the current monetary tightening https://www.financialexpress.com
phase has witnessed subdued deposit growth in comparison https://www.indianexpress.com

38 | 2024 | OCTOBER | BANKING FINANCE