The last three monetary policies were absorbed nicely by the stock market. In fact, the RBI Governor’s speech set the BSE Sensex roaring by over 1,000 points on September 30, 2022. In contrast, the one delivered on December 7 was a dampener, with the bellwether index down about 215 points to close in the red.

While the 35-basis point (bps) repo rate hike was anticipated and that didn’t cause much flutter, it’s the change in tone which the stakeholders — government, banks, India Inc and consumers at large — must focus on. From an exuberantly optimistic commentary in September, Wednesday’s speech by Shaktikanta Das was guarded, balanced and layered with concerns that one needs to factor.

Though he repeatedly emphasised that even if GDP growth estimates are lowered by 20 bps by the RBI (from 7 per cent in the earlier MPC to 6.8 per cent now), India will remain one of the fastest growing large economies — for the first time in many months, he didn’t take his foot off inflation.

Supportive steps

As a much-needed assurance, the RBI said it would inject liquidity in the system as and when required. The repo rate has increased by 225 bps from May 2022 to now. At 6.25 per cent, this is a comfort rate which India has flirted with three times between October 2016 and February 2019. As against the hikes, weighted average lending rates (WALR) on fresh and outstanding rupee loans have increased by 117 bps and 63 bps, respectively, between May and October 2022.

Weighted average domestic term deposit rate on fresh and outstanding deposits increased by 150 bps and 46 basis point during this period. This is contrary to perception that lending rates have increased faster than deposits especially on fresh business, but it also implies is that banks are already walking a very narrow bandwidth on availability of money and maintaining profitability.

While it is not reflecting on their net interest margin (NIM) in a broad-based manner yet, it’s a matter of time that the pain catches up. To partly mitigate the impact on the financials, the RBI has given banks a wide relaxation by extending the dispensation of enhanced held to maturity (HTM) limit of 23 per cent up to March 31, 2024. This will curtail treasury losses.

Small relief

Though the RBI is willing to handhold banks, the time to face the real test of rate hikes has arrived. India Inc, through various forums, is making a case of pause in rate hikes. NBFCs are factoring for a reversal in rates hike cycle by mid-2023. But the RBI’s thinking is different.

Despite inflation cooling off a bit, at over 6 per cent, its far from comfortable and the central bank is steadfast to bring the number to the tolerable 4-6 per cent range. Clearly, there will be more rate hikes, and we may be heading to the 2015 levels of 7 per cent repo rate, though not higher.

The question is whether borrowers, especially on the retail side, can afford 300 bps hike in their loan repayments in just a year. Corporate borrowers are on the fence amidst global uncertainties and talks of a recession. To expect massive demand from them other than working capital drawdowns could be a tall ask. Therefore, going by the WALR trajectory, banks may have to start absorbing more rate increases in order to maintain growth.

Though the RBI is willing to extend a helping hand, the fight for deposits to ensure optimum liquidity may turn more aggressive. Also, with the high-base effect on loan growth likely to set in by January 2023, demand for loans may taper vis-à-vis a year-ago.

While India may not face gloom because of the rate hikes, unlike the western world, its intended effects — that is to taper inflation — would become very visible soon.

GDP forecasts for FY24 have already undergone some downward revisions and is pegged at 6.7-7 per cent by credit rating agencies. But with headwinds likely to outnumber the advantages, caution is warranted.

FY23 may close with India leading the globe on growth. The challenge will lie in sustaining the show.