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The outlook for banks this year would largely be a function of the performance of the economy. Many, including the Reserve Bank of India, have indicated that interest rates will be cut and this would be positive for the economic outlook.
A 50 basis points cut in the cash reserve ratio would also help in boosting the economic sentiment.
The latest Index of Industrial Production numbers were positive and a repeat of this would be helpful.
Budget
Thereafter, the market would look to the Budget and the path of fiscal consolidation.
The gross planned expenditure proposed in the Budget would also guide the investment cycle.
The size of the rabi crop and the progress of the monsoon would be the other important factors.
A good monsoon would put more purchasing power in the hands of the rural and semi-urban population. Since India’s is significantly a ‘consumption story’, more purchasing power in the hands of rural and semi-urban population would augur well for the economy.
Since the savings rate in India is around 30 per cent, the outlook for bank deposits as a preferred mode of saving is quite promising.
Banks have to work harder to mobilise the savings of the people. We expect the credit growth to be more robust in the retail than in the corporate sector.
The consumption story, particularly in home and car loans, is quite strong and would continue to be so.
However, the prospect of credit growth in the corporate sector, to a large extent, will be determined by the difference in the rupee and dollar interest rates.
If they find significant advantage in borrowing in dollars, many of the corporates may substitute rupee borrowings with dollar borrowings.
Further, the overall lending demand would also be a function of investment cycle and growth of the economy.
I also expect the capital flows from abroad to continue, both from the foreign direct investment and foreign institutional investment routes.
This is because of the relatively higher growth being forecast for the Indian economy in comparison with the developed world.
(The author is Chairman, State Bank of India.)
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