Prolonged High Rates To Curb GDP Growth As Credit Expansion Slows

Amid higher-for-longer rates, the impact of the past monetary tightening is likely to continue, moderating credit growth, especially in segments such as non-banking financial companies (NBFCs) and unsecured consumer credit targeted by the Reserve Bank of India (RBI), Crisil Ratings has said in a report.

The report added that this is likely to weigh on the gross domestic product (GDP) growth this fiscal.

Amid strong economic growth, the RBI has been wary of monetary easing, remaining focussed on inflation risks. Like the Fed, the RBI’s Monetary Policy Committee (MPC) kept policy rates and stance unchanged in June.

Higher-for-longer rates could cap the easing of financial conditions this fiscal. The report added, “GDP growth continues to surprise both the RBI and Fed, giving them time to ensure a durable reduction in inflation to their target levels before cutting rates.”

While inflation in the United States (US) has been above the Fed’s 2 per cent target, the headline inflation in India is now within the Monetary Policy Committee's (MPC's) 2 to 6 per cent target range, but not at 4 per cent mid-point.

The RBI faces risks from sticky and elevated food inflation that could disturb inflation expectations. Monsoon holds the key to inflation and monetary easing this year.

"We do not expect the MPC to cut rates before October. Assuming normal monsoon and gradual slowing in GDP growth, we expect two rate cuts in the second half of this fiscal," Crisil Ratings added in the report.

The US Fed is likely to wait longer for a rate cut until December, according to S&P Global.