RBI should focus on streamlining credit pricing, monetary transmission: IMF

Photo: Reuters
The International Monetary Fund (IMF) has estimated that bank credit growth to India’s private sector will touch 13.6 per cent by the end of the current financial year. 

The IMF’s estimates suggest after that it will decrease by 30 basis points to 13.3 per cent by the end of FY20. 

“The corporate sector has been deleveraging slowly and, while debt repayment capacity and profitability appear to have bottomed out, they remain weak in aggregate,” said the IMF in its Article IV report on India.

Bank credit growth grew to 12.94 per cent as of the end of June 2018 on a year-on-year basis.

At the end of FY18, bank credit growth to the private sector stood at 9.8 per cent, as compared to 8 per cent a year earlier.

Bank credit to the commercial sector stands at Rs 92 trillion as of July 20, 2018, which is a growth of 11.9 per cent on a year-on-year basis, according to the Reserve Bank of India (RBI) data.

According to ratings and research firm CRISIL Ratings, corporate credit picked up this fiscal year as compared to last year, when it was less than 5 per cent. Private banks are leading the charge, with some recording 15-20 per cent growth in their corporate lending book.

The Indian authorities consulted by the IMF’s staff during the preparation of the report observed a strong uptick in credit from banks and other financial institutions to the commercial sector, compared to last year.

“With improving capacity utilization and credit uptake, investment activity is expected to remain robust even as there has been some tightening of financing conditions in recent months,” the Indian authorities noted. 

The RBI data for May shows credit to the corporate industrial sector grew by 1.4 per cent against a contraction of 2.1 per cent in May last year. Credit to the services industry grew more than five times to 21.9 per cent against 4 per cent growth in May 2017.

The RBI has done two rate hikes, in June and August, since August last year. With the policy repo rate growing from 6 per cent last year to 6.5 per cent at present, the IMF said the country’s monetary policy conditions were broadly neutral.

Inflation rates have been rising, with the consumer price index (CPI) rate touching a five-month high at 5 per cent in June on account of higher fuel costs, despite food prices easing since May. 

The wholesale price index (WPI) rate hit a four-year high in June at 5.77 per cent, rising from 4.43 per cent in May. 

In June last year, the WPI stood at 0.9 per cent and the CPI at 1.46 per cent, which was a reflection of cash shortage and industrial slowdown caused by demonetisation.

The IMF estimates that the CPI rate will rise to 5.2 per cent in FY19 and 4.8 per cent by FY20.

The IMF’s staff said now that a “robust” institutional framework for inflation targeting has been implemented for monetary policy, the RBI should focus next on encouraging banks to streamline credit pricing and improve the monetary transmission mechanism.

This refers to the time and efficiency with which monetary policy changes by the RBI are reflected in changes to interest rates of banks and other lenders.

On demonetisation, the report said the currency in circulation had risen above pre-demonetisation levels. The value of the currency with the public (CwP) at present stands at Rs18.6 trillion, which is 9 per cent higher than pre-demonetisation levels. It had crossed the pre-demonetisation levels in early April this year itself. 

“Uncertainty and disruptive cash shortages put a damper on consumer and business sentiment. As a result, high frequency indicators for consumption and production saw strong declines. The impact on growth appears to have been more severe and longer-lasting than anticipated…,” the report said.

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