Rising real lending rate roiling RBI rate cuts: report

Resultant fall in credit flow shows GDP contraction: BofA

Reserve Bank slashed key interest rates by 135 basis points (bps) since February this year.

Even after the Reserve Bank slashed key interest rates by 135 basis points (bps) since February this year, the real lending rates have only gone up by 44 bps in spite of the nominal lending rates falling by 105 bps during the same period, says a report.

According to the house economists at BofA Securities India, this high lending rate is the main reason for the steeply falling credit flows, which conversely also point to a deeper GDP contraction, accentuated by the pandemic.

The brokerage had last month pencilled in 5-7.5% contraction in GDP this fiscal, saying each month of lockdown had shaved off 100 bps of the economy.

According to them, “loan flow is a whopping 106% lower than last year, since the first lockdown was lifted in Mid-May” and both low credit demand and high real lending rates are constraining the recovery.

Money supply

A saving grace is that rising M3 (money supply) growth creates room for lending rate cuts to the tune of 100 bps more before March, they say. “High real lending rates, adjusted for core WPI as a proxy for pricing power, still constrains recovery beyond the pandemic shock. While nominal MCLR has come off by 105 bps since March 2019 on RBI easing, the real MCLR has jumped by 44 bps, with core WPI inflation dropping to 0.8% in June from 2.3% in March 2019.

“Similarly, since March 2019, the weighted average lending rate (WALR) has eased 37 bps in nominal terms in May, the real WALR has shot up 147 bps,” they say and point out that this is one of the reasons for the steep fall in credit offtake.

On the deep growth contraction due to the pandemic, they note that credit flows between July and mid-March is 36% lower than last year; and between end-March to YTD the contraction is 52.2% from 2019.

From end-April, credit contracted by ₹50,800 crore in contrast to the offtake of ₹44,600 crore last year; and from end-May it contracted by ₹2,500 crore in contrast to an offtake of ₹42,300 crore last year.

Apart from rate cuts, the RBI could announce a $105 billion OMO (open market operation) calendar on one hand to help banks lower their lending rates and the finance ministry on the other hand could announce recapitalisation of state-run banks either through recap bonds or through doing a revaluation of the RBI reserves.