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Moody’s expects limited impact of RBI’s rate hikes on banks profitability

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Although the RBI’s series of rate hikes are likely to drive banks’ net interest margins, however, Moody’s Investors Service expects the rise of key rates to be limited as funding costs will increase faster than loan rates. RBI has hiked the repo rate four times in a row this fiscal to tame multi-year high inflation. 

In a note on Wednesday, Moody’s said that NIMs (net interest margins) will increase but only around 15-25 basis points, lagging rises in interest rates, reported by PTI.

Further, Moody’s pointed out that tight liquidity conditions will push banks to increase their deposit interest rates at a rapid pace compared to hiking lending rates. Also, the rating agency believes competition for high-quality borrowers will further curb rises in lending rates.

According to Moody’s, loans to small and medium-sized enterprises are likely to see deterioration in asset quality, on the other hand, corporate and retail loans would be largely stable. Small and medium businesses are seen as vulnerable to higher costs of capital.

Further, Moody’s expects banks’ profitability to be reined in by losses on their government securities holdings as bond yields soar.

While expecting India’s economic growth to slow, Moody’s also said the country’s economic growth outlook is still better than its peers.

Since May this year, RBI has hiked the policy repo rate by 190 basis points. Currently, the repo rate is at 5.9%. More rate hikes are stored in cards going forward.

India’s CPI inflation is currently at 7%. The inflation has been above RBI’s upper tolerance limit for the eighth consecutive month. RBI’s medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

RBI is an inflation trajectory central bank and its policy outcomes revolve around the movement of CPI. 

In the September policy, RBI has projected CPI inflation at 6.7% for the entire fiscal FY23 which is still above its tolerance limit. For Q2FY23, RBI expects inflation to be at 7.1%, while the CPI is seen at 6.5% and 5.8% for Q3 and Q4. For the first quarter of FY24, the central bank expects inflation at 5%.

RBI factors GDP growth at 7% for FY23.

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