Mumbai (Maharashtra) [India], March 14 (ANI): 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 opines that the transmission of monetary policy in the banking system could intensify in FY24 driven by the sharp rise in bank’s marginal cost of funding.
MCLR is the minimum lending rate below which a bank is not permitted to lend. The drawdown from the reverse repo in FY23 to the tune of Rs 5 trillion has enabled banks to address a surge in the gap between incremental credit and deposit, and this will not be available in FY24, the rating agency said. Therefore, MCLR will show a significant rise.
Moreover, a tepid balance of payments (BoP) surplus of around Rs 600 billion would not bring any reasonable improvement in the aggregate deposit, according to the rating agency. Therefore, even if the policy rate remains stable for FY24, rates in the banking system will continue to face upward pressure.
Ind-Ra expects the system liquidity to tighten further in the coming two-three weeks of March 2023, owing to multiple factors such as advance tax payment, goods and services tax (GST) payment and targeted longer-term refinancing operations (TLTRO) maturity. Moreover, with the onset of year ending, the activity in the banking system is expected to accelerate, especially on account of credit offtake.
Ind-Ra continues to believe that the Reserve Bank of India (RBI) will remain supportive by ensuring the presence of required system liquidity; however, tools and mechanism could vary between long-term repo auction and open market purchase of short-term bonds or treasury bills (T-bills).
The rating agency also opines that the upcoming period of tight liquidity could prove to be onerous for entities with a weak liquidity profile. Overall, the agency does not expect a broad-based weakness in the corporate credit profile owing to the prevailing monetary conditions; however, sustained pressure on operating margin and tight monetary conditions (both cost and availability) could increase refinancing risks for weak entities.
Ind-Ra expects there would be a net addition of USD 7.2 billion in the forex reserve in FY24. It expects the current account deficit to narrow down to 2.5 per cent of GDP in FY24 (FY23: 3.3 per cent) in response to the evolving domestic and global demand. Flows in capital account are estimated to improve to USD 93.9 billion in FY24 from USD 71.6 billion in FY23. Therefore, incremental deposit creation by way of net forex flows will remain limited to the tune of around Rs 600 billion, the rating agency added.