RBI Governor Shaktikanta Das said on Friday that banks cannot rely forever on central bank money to support credit decline and must mobilize more deposits to fuel credit growth.
He said banks have already started relaying the repo rate hike to their depositors and the trend is expected to continue.
“If there is a drawdown, banks can only sustain and support that drawdown if they have higher deposits. They can’t rely forever on the central bank’s money to support the drawdown… they have to use their own resources and resources mobilize,” Das told reporters at the post-policy meeting.
The six-member Monetary Policy Committee (MPC) on Friday raised the repo rate by 50 basis points to 5.40 percent and also decided to remain focused on moving accommodation to ensure inflation stays within target in the future while supporting growth. .
This is the third consecutive rise by the RBI since May this year in its battle against inflation, which hovers above the central bank’s tolerance limit of 4-6 percent. Inflation based on the consumer price index (CPI) was 7.01 percent in June.
In May, RBI increased the repo rate by 40 basis points and in June by another 50 basis points.
Following these rate hikes, many banks have increased their deposit rates to some degree.
RBI Deputy Governor Michael Patra said there was a very aggressive deposit mobilization, starting with the bulk deposits.
“We expect the deposit mobilization to catch up with credit very quickly,” Patra said.
In the two weeks ending July 15, bank credit grew by 12.89 percent and deposits by 8.35 percent.
Das said the most likely scenario is that the impact of the rate hike will be passed on by banks to the deposit rate.
“The trend has already started. A lot of banks have increased their deposit rates in recent weeks and that trend will continue,” he said.
Speaking about the liquidity scenario, the governor said the RBI will conduct two-way operations to deal with the prevailing liquidity situation.
He said there was a sudden liquidity tightness for about three to four days last month due to very high GST and other tax collections, and so the RBI ran a fine-tuning operation of injecting repos with three-day maturity dates.
“Our effort will be to ensure that there is sufficient liquidity,” he added.
When asked whether there were concerns about higher amounts on bad loans being written off by banks, compared to chargebacks and upgrades, Vice Governor MK Jain clarified that these were technical and prudential write-downs without relinquishing the right of chargeback.
“All these loans have been fully extended and this reflects prudence and an improved balance sheet position,” said Mr. Jain.
He said that in the past two and a half years there has been a downward trend in write-downs and an upward trend in the revaluation of non-performing loans.
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