MUMBAI, July 4 (Reuters) – Bank lending to the Indian economy may not experience a significant increase despite the substantial liquidity surplus in the banking system, according to economists at J.P. Morgan in a report released on Friday.
Although surplus liquidity affects overnight borrowing costs, recent analysis by the firm indicates that it does not significantly influence credit or deposit growth within the economy.
The Reserve Bank of India has implemented steep rate cuts and injected significant liquidity into the banking system since December, aiming to counter signs of economic slowdown in India amid moderate inflation.
The Reserve Bank of India expressed its hope that the combination of rate cuts and accessible liquidity would facilitate the transmission of lower interest rates throughout the economy, encouraging increased borrowing by individuals and businesses.
Bank credit growth declined to below 10% in May.
“We find that the role of liquidity in enhancing monetary policy transmission primarily occurs through its influence on overnight market rates within the policy corridor,” stated J.P. Morgan economists Toshi Jain, Sajjid Z Chinoy, and Divyanit Sood in their July 4 study.
“There is no evidence of a ‘credit channel’ affecting deposit and lending growth beyond this.”
The economists noted that their findings suggest the central bank should only inject or withdraw liquidity as necessary to maintain overnight rates aligned with the policy repo rate, emphasizing that excess liquidity operations have no independent impact on credit growth.
A significant surplus of liquidity in the Indian market has driven overnight rates below the policy repo rate in recent months, and in some instances, even below the floor of the interest rate corridor.
On Friday, the RBI withdrew 1 trillion rupees ($11.7 billion) from the banking system through a seven-day variable rate reverse repo operation, continuing an action from the previous week to prevent rates from falling excessively.
India’s policy repo rate, which represents the midpoint of the corridor, is currently at 5.50%, while the standing deposit facility (SDF) rate, which serves as the corridor’s floor, stands at 5.25%.
“Raising the overnight rate would represent a tightening of monetary policy at a sensitive time. However, eventually, adherence to the sanctity of the operating target will be necessary,” remarked J.P. Morgan economists.
Reporting by Ira Dugal; Editing by Nivedita Bhattacharjee
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India liquidity surplus may not push growth in bank credit up, J.P. Morgan economists say
MUMBAI, July 4 (Reuters) – Bank lending to the Indian economy may not see a meaningful boost despite the large liquidity surplus in the banking system, economists at J.P. Morgan said in a report on Friday.
While surplus liquidity influences overnight borrowing costs, a recent analysis by the firm showed it does not impact credit or deposit growth in the economy.
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The Indian central bank has cut rates steeply and flooded the banking system with liquidity since December as it sought to counter signs of a slowdown in the Indian economy amid modest inflation.
The Reserve Bank of India has said it hopes the combination of rate cuts and easy liquidity would help transmit lower interest rates across the economy and prompt individuals and firms to borrow more.
Bank credit growth slipped to below 10% in May.
“We find that the role of liquidity in boosting monetary policy transmission occurs primarily through influencing overnight market rates, within the policy corridor,” J.P. Morgan economists Toshi Jain, Sajjid Z Chinoy and Divyanit Sood said in the study dated July 4.
“There is no evidence of a ‘credit channel ‘ on deposit and lending growth beyond this.”
The economists added that the findings suggest the central bank should inject or withdraw only as much liquidity as needed to keep overnight rates aligned with the policy repo rate, adding that excess liquidity operations have no independent effect on credit growth.
A large surplus of liquidity in the Indian market pushed overnight rates down to below the policy repo rate in recent months and, in some cases, even below the floor of the interest rate corridor.
The RBI withdrew 1 trillion rupees ($11.7 billion) from the banking system on Friday through a seven-day variable rate reverse repo, rolling over an operation from last week, to ensure rates don ‘t fall too low.
India ‘s policy repo rate, the mid-point of the corridor, stands at 5.50%, while the standing deposit facility (SDF) rate, the floor of the corridor, is at 5.25%.
“Pushing up the overnight rate will constitute a tightening of monetary policy at a delicate time. Yet, eventually, the sanctity of the operating target will need to be adhered to,” J.P. Morgan economists said.
Reporting by Ira Dugal; Editing by Nivedita Bhattacharjee