With India’s retail inflation surging to a nine-month high of 5.5 per cent in September, and expectation of higher inflation print in October as well, repo rate cuts at this juncture seem premature and highly risky, Reserve Bank of India (RBI) Governor Shaktikanta Das said on Friday.
“Rate cut at this stage will be very premature and can be extremely risky. When your inflation is at 5.5 per cent and the next print is also expected to be high, you can’t be cutting rates at that point. More so, if your growth is also performing well,” the Governor said at the Bloomberg India Credit Forum.
The RBI’s six-member monetary policy committee (MPC) earlier this month decided to keep the benchmark policy repo rate unchanged at 6.50 per cent while changing the policy stance to “neutral” from “withdrawal of accommodation”.
Das said while the US Federal Reserve has cut interest rates, India is not “behind the curve,” and that the country’s growth story remains intact with the MPC projecting a 7.2 per cent GDP growth rate for the current fiscal. A potential rate cut in future will be entirely dependent on incoming data and favourable inflation outlook.
Corporate bond market
Even as India’s corporate bond market has grown from nearly ₹3.7 lakh crore to ₹8.6 lakh crore-₹8.7 lakh crore over the last decade, there are issues that need consideration to further deepen the bond markets.
“The RBI has taken few steps in recent years. For example, there is a partial credit enhancement that the RBI has facilitated. We have now permitted corporate bonds also to be treated as part of the HTM (held-to-maturity) holdings of banks.”
For major projects, the regulator has mandated that ideally 50 per cent of resources should be accessed from the bond market. Further, the number of institutional investors participating in the bond market needs to grow, especially foreign investors, Das said. The focus must also be on developing a robust secondary market for corporate bonds, he added.
Private credit
Furthermore, Das called on global central banks and regulators to ascertain the potential financial risks arising from the private credit market. “At the global level, private credit is increasingly posing certain risks and I think every regulator should be looking into that. Quality of credit appraisal, collateral involves certain risks,” he said.
The resilience of private credit in a downward credit cycle, Das says, is yet to be tested. Accordingly, regulators and institutions must conduct stress tests under all scenarios to ascertain risk build-up.
However, in India, the risk arising out of the private credit market is lower, as the market is largely dominated by highly regulated non-bank lenders. Das also said that the RBI is maintaining a close vigil on the broader credit market. His comments come a day after the regulator barred four non-bank lenders from fresh sanction of loans due to severe violation of norms.
