The theme of a column on banking and finance that appears on January 1 is cast in stone — the New Year trends.
Before that, a quick recap of 2023.
The 10-year bond yield was 7.33 per cent at the beginning of the year; it had seen a high of 7.445 per cent (on March 8) and low of 6.945 per cent (May 7); and closed the year at 7.175 per cent.
The banking sector’s deposit portfolio has grown 14 per cent to Rs197.92 trillion (year-on-year till December 15), and credit has grown 20.2 per cent to Rs158.05 trillion.
India’s foreign exchange reserves are worth $620.44 trillion as on December 22 versus $562.85 billion in the beginning of the year even as the rupee closed the year at 83.21 a dollar, making it the most stable currency in emerging markets. At the beginning of the year, the level was 82.66; its lowest level was 83.50 (November 10) and its strongest was 80.885 (January 23).
Finally, retail inflation has seen a low of 4.31 per cent in May and a high of 7.44 per cent in July.
Let’s look ahead.
We can claim that India is decoupled and doesn’t care about what the US Federal Reserve is doing, but the fact remains that a lot of what the Reserve Bank of India (RBI) does in 2024 will depend on what the Fed does. Incidentally, both the nations will hold general elections this year — India ahead of the US.
The fight against inflation is far from over. No one knows this better than RBI Governor Shaktikanta Das. The impression was gaining ground in mid-2023 that the Indian central bank had quietly shifted the target for inflation from 4 per cent to 6 per cent, the upper end of the band (target is 4 per cent +/- 2 per cent). But in the last few months, from every platform Das has kept on reminding us that the target is 4 per cent and he won’t give up before it is achieved.
So, one thing is for sure that he won’t be in a hurry to cut the policy rate.
The projection for retail inflation is 5.4 per cent for the financial year ending in March 2024. For the March and June quarters of FY25, it is 5.2 per cent and, after dipping to 4 per cent in the September quarter, it is slated to rise to 4.7 per cent in the December quarter.
When did we see 4 per cent inflation last time? It was in September 2019 (3.99 per cent)! In fact, between August 2018 and September 2019, for 11 months, the retail inflation was less than 4 per cent in a row. Since then, it was close to 4 per cent only once — in January 2021 (4.06 per cent).
In other words, for over four years now the retail inflation has been above the target. Just imagine, how it has been eroding the value of money for the masses and their power of consumption. If inflation is not controlled, it will affect growth.
Since the RBI wants to bottle the inflation genie within 4 per cent on a durable basis before cutting the rate, it will be a long wait for the rate cut. It should happen this year but the timing will depend on the growth-inflation dynamics as well as the US Fed action.
Will the Fed start cutting the rate in the springtime? It could as the prices dropped in November, for the first time since 2020, leading to decline in annual inflation in the US below 3 per cent (2.6 per cent is not far from the Fed’s 2 per cent target). It’s true that the Fed won’t rush to cut the rates but it’s just a matter of time and there could be as many as three rate cuts — overall by 0.75 percentage points.
We may see the RBI changing the stance of the policy from “withdrawal of accommodation” to “neutral” after the first rate cut by the Fed and follow it up with a rate cut in the subsequent meeting of its Monetary Policy Committee.
If indeed the Fed goes for three rate cuts, how many rate cuts are on the RBI’s table this year? It will depend on the inflation trajectory and the real interest rate that the Indian central bank wants to settle for. The last rate hike happened in February 2023 — by a quarter percentage point, the lowest since the rate-hiking cycle started in May 2022. In these 10 months, the policy rate climbed from 4 per cent to 6.5 per cent.
Before this, the last time the policy rate had been 6.5 per cent was in February 2019, when the retail inflation was 2.57 per cent.
To understand why one should not expect a rate cut too soon we need to look at the real rate (or natural/neutral rate) — the rate of interest a saver or lender receives after allowing for inflation. There is no clarity on the benchmark for arriving at this rate. It could be the policy rate (the repo rate at which the RBI lends money to the commercial banks), which is 6.50 per cent now, or one-year treasury bill (around 7.16 per cent). As the RBI projection for retail inflation is 5.4 per cent for FY24, if it wants to keep the real interest rate at 1.25-5 per cent, the rate can be cut to 6 per cent only when inflation veers around 4.5-75 per cent for months.
While the US economy is likely to avoid a recession (there will be a soft landing this year, following the Fed’s relentless fight against inflation, raising the policy rate to the highest level in 22 years) India is a different story. The RBI expects the Indian economy to grow at 7 per cent in FY24 and 6.7 per cent in the first quarter of FY25. India emerges as a “star performer” in the International Monetary Fund report and is expected to contribute at least 16 per cent to global growth while the World Bank takes note of the Indian economy’s resilience, characterised by robust domestic demand, investment in public infrastructure and strengthening financial sector.
From macro, let’s shift to the micro trends of the year.
Banks will continue to fight for deposits as the savers explore other investment avenues. Unless inflation is contained, the deposit rate will remain high. This will affect the banks’ interest income as the pile of low-cost current and savings accounts will continue to fall.
This will also have an impact on some banks’ ability to lend. They have been supporting high credit growth by capital as the growth in their deposit portfolios has not been able to keep pace with the loan growth. At some point, they won’t have any choice but go slow on the credit lane.
The quality of the asset book of the banking industry is at its decadal best now. How long will it remain at this stage? There are slippages in the unsecured personal loan segment even though it has not surfaced in a spectacular way. Particularly, some of the non-banking financial companies that have been in the space of short-term unsecured consumption loans — call it convenience loan or buy-now-pay-later facility — could be in trouble. The RBI is keeping a hawk eye on this.
Instances of digital frauds and phishing have been on the rise. Even fixed deposits have been hacked. This area will continue to remain in the limelight and many of the loan apps will be under the regulator’s scrutiny.
Finally, the RBI’s focus on governance in banks will also continue. Along with that, customer care may take the centre stage this year.
On that note, let me end this column wishing my dear readers a Happy New Year.
This column first appeared in Business Standard
The writer, a Senior Adviser to Jana Small Finance Bank, writes Banker’s Trust every Monday in Business Standard.
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