RBI expects rate hike transmission to temper credit growth in coming quarters

Given that banks and NBFCs are witnessing strong credit growth, will this rate hike dampen loan demand?

Swaminathan J: Credit growth is already running at a robust 18-19 per cent. Over the long term, a growth rate of 12-14 per cent is generally seen as sustainable and supportive of economic growth. Some moderation is likely as policy rate transmission takes place over the next couple of quarters, affecting both demand and borrowing costs. However, a moderation from current levels would still be healthy and sufficient to support economic growth.

Large banks are not planning to raise deposit rates immediately due to surplus FCNR(B) inflows. When do you expect deposit rate transmission to begin?

Sanjay Malhotra: We are already seeing FCNR(B) deposits being deployed, as reflected in strong credit growth. However, given the large inflows, we do not want banks to deploy them all at once. They should undertake proper due diligence and use these deposits prudently. While liquidity is currently in surplus, we do not expect this to be a long-term phenomenon, as factors such as currency leakage, reserve requirements, and our liquidity management operations, including spot and sell-buy swaps, will gradually absorb excess liquidity.

When do you expect banks to utilise their FCNR(B) deposits?

Malhotra: We do not expect these surplus liquidity conditions to last very long. Within this financial year itself, a significant portion of the excess liquidity is likely to be absorbed. Currency leakage alone typically absorbs around ₹3 lakh crore, and we have already undertaken sell-buy swaps. We also have other tools at our disposal, such as OMOs, VRRRs, and spot market interventions to support the rupee. Therefore, I do not expect liquidity to remain in a high-surplus mode for an extended period.

Forex swaps are expensive for the Reserve Bank. Wouldn’t a CRR hike be a cheaper option for the system?

Malhotra: As I mentioned earlier, a CRR increase is one of our least-preferred options for absorbing liquidity. I would also like to point out that when discussing the cost or benefit to the Reserve Bank, the broader economic benefits arising from FCNR(B) deposits are more important than the cost incurred by the RBI. Cost considerations are not our primary objective.

From October 15, MDR will be applicable. Many people are concerned that transaction volumes could decline. Should the RBI have borne the cost instead?

Rohit Jain: As of now, we have not seen any decline in transaction volumes, and I do not believe that a small fee will have a significant impact on volumes.

In the current geopolitical environment, does India need a higher neutral rate to attract and retain capital flows?

Poonam Gupta: Demand for capital is rising globally, driven by hyperscalers and other emerging sectors. However, India is relatively insulated due to its fiscal prudence, limited sovereign borrowing requirements, and a strong domestic savings and investment base. With corporates holding healthy cash reserves and bank credit remaining robust, India’s dependence on global capital is lower than that of many other economies.

There have been several concerns regarding the new export declaration requirements under the revised FEMA rules. What is your view on this?