Rising Real Lending Rate Affecting RBI Rate Cuts, Says Report

Mumbai, Aug 3: Even after the Reserve Bank has slashed the 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 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 penciled in 5 to 7.5 per cent contraction in GDP this fiscal, saying each month of lockdown has shaved off 100 bps of the economy.

 According to them, "loan flow is a whopping 106 per cent 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.

 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 per cent in June from 2.3 per cent 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 per cent lower than last year; and between end-March to YTD the contraction is 52.2 per cent from 2019.