RBI News- High-interest rates: Investments constrained by high real rates
Ahead of RBI’s monetary policy review, it is interesting that ICICI Bank has raised loan rates across tenures. It is not just ICICI Bank; other banks, too, have been increasing the Marginal Cost of Funds-based Lending Rate (MCLR)—to which most loans are now pegged—over the past few months. The fact is credit off-take is outpacing the accretion of deposits; incremental growth in bank credit in 2018-19 so far—November 9—has been 5.6% compared with just 1.1% in the comparable period of 2017-18. And, in recent fortnights, loan growth has been averaging 14-15% y-o-y compared with just 7-8% in the same period of 2017.
On the other hand, deposits are growing at a much slower 8-10% y-o-y. Indeed, some of the moves to banks, industry watchers say, has to do with the poor performance by mutual funds this year. Banks have tried to lure savers by raising rates; interest rates on term deposits have risen from an average of 6.38% in November last year to 6.75% in November 2018. With their costs up, lenders have had little choice but to raise loan rates to ensure their margins don’t contract. That is unfortunate at a time when the economy’s nascent recovery is faltering as can be seen from the very disappointing GDP growth in Q2FY19 of just 7.1% y-o-y.
Already, real interest rates are very high, at 5% or more, and could move up given how inflation is expected to ease further on the back of falling crude oil prices and stagnant food prices. Businessmen are loathed to invest at these levels because they believe the returns aren’t remunerative enough. And for small entrepreneurs, already struggling in a weak demand environment, even a 5-bps hike in interest costs hurts badly. Despite RBI having infused some `1 lakh crore in the past three months via open market operations and the yield on the benchmark trending down from close to 8% to 7.6% levels, loan rates are going up. Banks need a lot more liquidity especially if they are going to be funding non-banking financial companies post the liquidity crisis.
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