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The Reserve Bank of India’s recent decision to hike risk weights on certain segments of consumer credit is a reflection that the central bank has “turned cautious from conscious”, India Ratings said.
While banks, with their strong capital buffers, should be able to largely absorb the incremental capital requirements, NBFCs will need to borrow more from the capital markets leading to an increase in lending rates amid robust demand.
“With sustained pressure on inflationary drivers coupled with strong credit growth, the lending rates could only go up in the near term. Believing the policy rate has peaked out, the RBI is expected to use an array of instruments and levers to nudge the lending rates towards the higher side,” said Soumyajit Niyogi, Director, Core Analytical Group.
The spread between MCLR and repo facility is at a six-year low, suggesting incomplete pass-through of the tightening credit cycle caused by the stiff competition among banks. Even as the repo rate stays at the current level of 6.5 per cent, MCLR could go up modestly, the rating agency said.
System liquidity
However, the key monitorable aspect will be system liquidity from the macro side and balance sheet liquidity from the micro side, it said, adding that high-rated borrowers will continue to benefit from the intense competition in terms of lending cost.
Overall, in its base case scenario, India Ratings does not envisage any large OMO sales, barring regular interventions by the RBI as excess liquidity is likely to correct in Q3 FY24.
“The sustained strong retail lending seems to have become one of the key monitoring factors for the regulator, which also necessitates close monitoring of short-term rates to ensure proper allocation of short-term capital without stoking inflation or financial stability risk,” it said, adding that the RBI wants to maintain system liquidity at an optimum level to avoid excess liquidity causing any risk to financial stability.
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