The Reserve Bank of India (RBI) is unlikely to announce any rate cuts in its upcoming monetary policy meeting, according to a report by the State Bank of India (SBI). The report cites India’s strong economic growth, potentially exceeding its long-term potential output, as the key reason for maintaining the current interest rates.
The SBI report highlights that domestic economic conditions are at the forefront of the central bank’s decision-making process. With growth surpassing potential output levels, the case for holding rates remains strong. “Domestic conditions are paramount and with robust growth higher than potential output, case of pause exists,” the report said.
The report suggests that the RBI may not follow the interest rate trends in the United States. Instead, it may take an independent approach based on evolving local conditions.
“RBI may disassociate from the interest rate developments in the US and may take independent view on the domestic rates based on evolving conditions” the report added.
The SBI report also underscores the link between credit growth and deposit growth in India’s banking system. It points out that credit growth directly influences deposits, and a slowdown in credit demand could lead to a decline in deposits. To prevent this, it is crucial for the investment cycle to remain active, as investments drive the demand for credit, which in turn fuels deposit growth.
“In other words, credit granger cause deposits and hence a decline in credit will lead to decline in deposits going forward,” the report explains. A strong investment cycle is therefore necessary to maintain healthy levels of both credit and deposits in the banking sector.
While some may have expected the RBI to lower rates in light of global developments, the SBI report suggests that robust domestic growth and the need for sustained credit growth could prompt the central bank to hold rates steady in the near term. The RBI’s focus appears to be on ensuring that India’s economic momentum continues without being overly influenced by global factors. (ANI)