The interest rate cycle is headed down, technically speaking. But don’t expect banks to start cutting loan rates any time soon.
That’s because lower deposit accretion has forced the lenders to increase deposit rates. And unless this trend changes – and soon – banks cannot lower the lending rates, going forward.
Deposit growth continues to lag loan growth by a yard and some.
As on December 14, bank credit was up 16.3% year on year, compared with 17% last year, while deposit growth was at 13.3%, compared with 18% last year, as per RBI data.
Worryingly, at 77.1%, the credit-deposit ratio is back to levels last seen in March.
“These dynamics imply that unless net external financing flows see a dramatic increase, Indian banks will be required to keep funding costs (and hence lending rates) elevated for longer,” said a Morgan Stanley note.
This, in turn, is likely to bring down credit growth marginally towards the fiscal end.
“A combination of lower resources and lower loan demand may lead to such a situation,” said Clyton Fernandes, banking analyst, Anand Rathi Securities. He expects this fiscal to end with 15.6-15.7% credit growth.
Typically, the fourth quarter witnesses higher credit demand.
That may not be the case this year as “the finance ministry has nudged public sector banks to limit their bulk deposit proportion, which may keep credit growth in check,” ICICI Securities said in a note.