Policy rates unlikely to be cut as growth rate exceeds potential output, claims report

New Delhi| Due to strong economic growth in India, the Reserve Bank of India (RBI) is unlikely to announce a rate cut in the upcoming Monetary Policy Committee meeting. State Bank of India (SBI) has said this in a report. The report indicates that the primary factors influencing central bank decisions are domestic economic conditions. India is seeing strong economic growth, potentially exceeding its long-term potential output. In such a situation, maintaining the rates has the upper hand. According to SBI report, the Reserve Bank of India can maintain the policy interest rates at the current rates instead of reducing them.

The SBI report also indicated that the central bank will not follow the Fed’s decision to cut interest rates in the US. Instead, the RBI may adopt an independent approach based on the evolving domestic economic situation. RBI may focus more on local factors while deciding its monetary policy stance.

Furthermore, the report highlighted an important link between loans and deposits in India’s banking system. The report said credit growth affects deposit growth, meaning a decline in credit demand could lead to a decline in deposits in the future. Therefore, it is important for credit growth to remain strong to ensure that deposit growth does not decline. This can happen only if India’s investment cycle remains active, as investment increases the demand for credit. Businesses and industries need credit for expansion, and this leads to an increase in deposits as more money flows through the banking system.

According to the report, debt causes deposits and hence a decline in debt will lead to a decline in deposits in the future. Therefore, a strong investment cycle is necessary to maintain healthy credit and deposit levels in the banking sector. The SBI report said strong domestic growth and sustained credit growth may push the central bank to keep rates stable in the near future. SBI has said in its report that RBI’s focus will be on ensuring that India’s economic momentum continues without being overly influenced by global factors.