Despite the Reserve Bank of India (RBI) pausing interest rate hikes in the last two monetary policies, the impact of past rate hikes on growth will be more prominent in FY24, according to CRISIL Financial Conditions Index (FCI) report for May.

The real repo rate, or repo rate adjusted for CPI inflation, rose to a nearly four-year high of 2.2 per cent in May — the highest since August 2019. With growth seen slowing as a result, the central bank is expected to maintain status quo in August and initiate rate cuts in the last quarter of FY24.

“While the pause on rate hikes has augured well for financial markets, elevated bank lending rates could tighten financial conditions for some segments of the economy. Rates will rise further in real terms as inflation moderates,” CRISIL said adding that rates at current levels are expected to temper demand in the economy in the coming months.

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The benchmark MCLR, home loan and auto loan rates have surpassed the pre-pandemic five-year average in May. Bank credit growth moderated to 15.4 per cent on-year from 15.9 per cent in April.

While this growth is still the strongest in a decade, a few sub-components — such as personal loans, housing loans and auto loans — are witnessing more slowdown, reflecting some impact of elevated lending rates, it said.

On a whole, however, India’s financial conditions continue to remain stable with CRISIL’s FCI remaining unchanged at 0.3 in May — higher than the average of negative 0.1 seen in the March quarter.

Also read: Wholesale inflation declines to 90-month low of -3.48% in May

Global volatility

Despite global volatility, FPI inflows in both debt and equity markets surged to a nine-month high in May, boosting returns in these segments. Net FPI inflows increased to $5.9 billion in May, the highest since September 2022, from $1.7 billion in April, also aided by the sharp fall in crude oil prices. Of this, $5.3 billion of inflows were in equity whereas $0.4 billion were in debt.

“While the risk of tight and volatile global financial conditions persists, India’s vulnerability to these shocks is likely to be lower this year. India’s key external liability — current account deficit — will likely be pared this fiscal on the back of lower crude oil prices. This, coupled with the RBI’s adequate forex reserves and the country’s good growth prospects, should cushion the impact of a global spillover on overall macros,” said CRISIL.