Going by the Chinese zodiac, 2025 is the Year of the Snake. The Chinese calendar, which is over 2,000 years old, is based on a 12-year cycle, with an animal from Chinese mythology representing each year. The snake, the sixth animal in the zodiac, takes centre stage in 2025.<\/p>\n
The Chinese character for the snake represents a serpent emerging from the ground after hibernation. It symbolises unveiling of something hidden or the start of a movement or something new, given the snake\u2019s ability to shed its skin. This is why it is also associated with transformation, renewal, and spiritual growth \u2013 reasons why snakes are considered auspicious in Japan.<\/p>\n
So, what new beginning will we see in the Indian banking and financial sector in the Year of the Snake? Will we see a new trend with the sector shedding its skin and transforming itself? Or, will the theme of the year remain continuity with change?<\/p>\n
If it\u2019s not broken, why fix it? That\u2019s why continuity. And the possibility of change since three key regulators in the financial sector could be new. The Reserve Bank of India (RBI) already has a new governor; it is set to get a new deputy governor, too, to oversee the all-important monetary policy department. And then, the terms of the capital market regulator and the insurance regulator are set to end over the next few months. We don\u2019t know who will continue and who will step down. But that shouldn\u2019t bother us. The snake, after all, is also a symbol of wisdom, craftiness and adaptability.<\/p>\n
The RBI\u2019s February monetary policy just after the Union Budget is a critical event in the 2025 calendar. This isn\u2019t just another policy. It is not every day that one experiences the kind of suspense that preceded the appointment of the RBI governor.<\/p>\n
The observation in the finance ministry\u2019s monthly economic report in December \u2013 that the combination of the monetary policy\u2019s stance and the central bank\u2019s macro-prudential measures as well as structural factors may have contributed to the slowdown in demand \u2013 points to the difference in the government and the RBI\u2019s approach towards inflation and growth.<\/p>\n
Will there be a rate cut in February? And if the banking regulator does kick off the rate-cut cycle, how deep or shallow will it be? Also, how will the RBI infuse liquidity in the system?<\/p>\n
How is the global scene? In the third week of December, the US Federal Reserve cut interest rates by a quarter per cent, to 4.25-4.5 per cent. With this, the Fed\u2019s three successive rate cuts have reduced the federal funds rate by a full percentage point. There was no surprise in the December rate cut, but the market wasn\u2019t expecting the policy makers to halve the quarter-point cuts from four to two. Now there is a feeling that it could be even one.<\/p>\n
Around the same time, the Bank of England decided to keep the policy rate on hold. This was after the second rate cut, to 4.75 per cent, in November.<\/p>\n
The European Central Bank (ECB) cut interest rates for the fourth time in December, and kept the door open for more cuts in 2025 with political instability dragging down the euro zone economy and the threat of a fresh US trade war.<\/p>\n
The ECB has been liberal in cutting the policy rate since inflation worries have almost disappeared. In fact, analysts are now wondering whether the ECB is cutting rates fast enough to support growth as the economy is falling behind global peers and has just about been skirting recession for over a year.<\/p>\n
The growth-inflation dynamics are different in different parts of the world. The Bank of England kept interest rates on hold in December since it\u2019s exploring how to respond to a slowing economy that is still struggling with inflation pressures. In contrast, the US Fed has cut the rate, but has at the same time hiked the headline inflation outlook. For 2025, its inflation estimate is 2.5 per cent, and the Fed doesn\u2019t see it returning to 2 per cent before 2027. The Fed has also raised the outlook for growth in the world\u2019s largest economy, to 2.5 per cent in 2024 and 2.1 per cent in 2025.<\/p>\n
What\u2019s happening in China is also worth looking at. China’s 30-year bond yield recently dropped below that of Japan for the first time ever, and this trend is set to be reflected in the lower tenure bonds. What does this signal? The global growth engine of this century may face the risk of \u201cJapanification\u201d.<\/p>\n
To quote a recent Reuters <\/em>report, the collapse in Chinese yields is a reminder that the deflation, bad debt dynamics and troubling demographic trends plaguing Asia’s largest economy today are strikingly similar to those that hobbled its fiercest regional rival for three decades.<\/p>\n How would the RBI look into the growth-inflation dynamics? After the dip in the GDP growth to 5.4 per cent in the second quarter of the current financial year, the RBI has pared its GDP growth projection for FY25 to 6.6 per cent \u2013 sharply down from 7.2 per cent. The estimate for the consumer price index (CPI) inflation, on the other hand, has been raised from 4.5 per cent to 4.8 per cent. The RBI\u2019s flexible inflation target is 4 per cent with a 2 percentage point band on either side.<\/p>\n Meanwhile, we have seen the change in the RBI\u2019s approach to the rupee. The rupee lost close to 3 per cent against the dollar last year, and the slippage continues. There has been substantial erosion in India\u2019s foreign exchange reserve between September and December \u2013 from $704.9 billion to $640.3 billion. The combination of dollar sale by the RBI to prevent a sharp fall in the local currency and the erosion in valuation has contributed to this drop.<\/p>\n Beyond the growth-inflation dynamics and the rupee-dollar exchange rate, there are other regulatory issues the sector will keenly watch. The implementation of the expected credit losses (ECL) regulations is one of them. Will RBI go ahead with its plan to shift from the traditional \u201cincurred loss\u201d to \u201dexpected loss\u201d accounting method, whereby banks estimate potential credit losses based on forward-looking assessments instead of waiting for the defaults to occur. Bankers aren\u2019t HAPPY about this since this will hit their profitability. But the regulator feels this is required to lend more resilience to banks\u2019 balance sheets.<\/p>\n Also, what\u2019s going to happen to the RBI\u2019s draft guidelines for project financing? These propose to strengthen the existing regulatory framework \u2013 by jacking up provisions by at least 12 times during a project\u2019s construction phase \u2013 and harmonise the norms across the lending community. The draft guidelines were issued in May last year.<\/p>\n There are other issues as well. The quality of the banking sector\u2019s assets continues to be good, but growth in both deposits and credit has been modest. Relatively high credit deposit ratio and the proposed changes in the liquidity coverage ratio have been affecting credit growth. On top of that, banks aren\u2019t exactly excited about disbursing unsecured retail loans and lending to the non-banking financial companies. Will this trend continue?<\/p>\n The health of the microfinance industry is another concern. Typically, this is a once-in-a-few-years phenomenon, but this time it\u2019s a bit different as the wound is self-inflicted. The industry had gone overboard in building balance sheets and making profits through \u201cpush\u201d loans. In the process, some borrowers ended up over-leveraging themselves and are not in a position to pay back. Let’s see how things unfold this year.<\/p>\n Finally, the year 2025 is unique in the world of mathematics \u2013 it\u2019s a perfect square, formed by squaring 45. The last time this occurred was in 1936\u00a0when the Great Depression was still on and World War II loomed on the horizon.<\/p>\n We have left the Covid pandemic behind; let\u2019s hope there is no other shadow looming ahead.<\/p>\n The writer, a Consulting Editor of Business Standard<\/em>, is a Senior Adviser to Jana Small Finance Bank Ltd.<\/p>\n