India Ratings and Research (Ind-Ra) on Tuesday said it expects bank marginal cost of funds based lending rate (MCLR) to increase by 100-150 bps year-on-year (YoY) in FY24. The rating agency believes that transmission of monetary policy to the banking system may intensify in FY24, driven by a sharp increase in marginal cost of funding of banks.
MCLR is the minimum lending rate below which a bank is not allowed to lend.
Reverse repo to drawdown in FY23 5 trillion has enabled banks to narrow the gap between incremental credit and deposits, and will not be available in FY24, the rating agency said. Hence, the MCLR would see a significant increase.
In addition, a sluggish balance of payments (BoP) surplus around According to the rating agency, 600 billion will not bring any reasonable improvement in the total deposits. Therefore, even if the policy rate remains constant for FY24, rates in the banking system will face upward pressure.
Ind-Ra expects system liquidity to further tighten in the coming two-three weeks of March 2023, which is due to advance tax payments, Goods and Services Tax (GST) payments and targeted long-term refinance operations (TLTROs). This is due to several factors such as maturity. , In addition, with the onset of the end of the year, activity in the banking system is expected to pick up, particularly on account of credit offtake.
Ind-Ra believes that the Reserve Bank of India (RBI) will continue to be supportive by ensuring the presence of necessary system liquidity; However, the instruments and mechanisms may differ between long-term repo auctions and open market purchases of short-term bonds or Treasury bills (T-bills).
The rating agency is also of the view that the coming period of liquidity crunch may prove difficult for entities with weak liquidity profiles. Overall, the agency does not expect broad-based weakness in the corporate credit profile due to current monetary conditions; However, continued pressure on operating margins and tighter monetary conditions (both cost and availability) may increase refinancing risk for vulnerable entities.
Ind-Ra expects a net addition of USD 7.2 billion to foreign exchange reserves in FY24. It expects the current account deficit to narrow to 2.5 per cent of GDP in FY204 (FY23: 3.3 per cent) in response to domestic and global demand. Capital account inflows are estimated to increase to US$ 93.9 billion in FY24 from US$ 71.6 billion in FY23. Therefore, incremental deposit creation through net foreign exchange inflows will be limited to a range of approx. 600 billion, the rating agency added.
The text of this story is published from a wire agency feed without any modification.
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