Reduction in lending rates insufficient to boost credit growth: BofA Securities

The sharp reduction in lending rates is insufficient to prop up credit growth which is set to fall in July this year, an American brokerage said on Tuesday. Deterioration in factory output and real wage growth are the impeding factors limiting the growth in credit, Bank of America Securities said in a note.

The Reserve Bank cut rates in five consecutive reviews in 2019 before pausing in December due to surge in inflation. RBI Governor Shaktikanta Das has said that the central bank was proactive in cuts when worrying signs started emerging on growth, which is set to slip to a decadal low of 5 per cent in 2019-20. The view was to push economic growth by making credit cheaper.

The brokerage firm said it has used a model, which takes on board data till November, to come at its estimates that credit growth will increase till March 2020 and fall in July 2020. It blamed falling industrial activity (IIP) and weaker wage growth, which have more than countered the impact of falling interest rates.

"Reduction in lending rates (is) insufficient to accelerate SCB loan growth," it said. It can be noted that credit growth had risen to 7.13 per cent for the fortnight ended January 31, as per the official data published by RBI.

The brokerage welcomed the initiatives taken by RBI on rate cuts as well as liquidity injection, and said that rates have fallen up to 0.65 per cent as against the cut of 1.35 per cent by RBI.

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