Policy rate cuts unlikely as growth rate exceeds potential output, claims SBI report

SBI has said in a report that the Reserve Bank of India (RBI) is unlikely to announce a rate cut in the upcoming Monetary Policy Committee meeting due to strong economic growth in India. As per the report, the major factor influencing the central bank's decisions are domestic economic conditions. India is experiencing rapid economic growth, which could exceed its long-term potential output. In this case, maintaining rates gives you an advantage. According to the SBI report, the Reserve Bank of India may keep policy interest rates at their current levels rather than reduce them.

The SBI report has also indicated that the central bank will not toe the Fed's decision of rate cuts in the US. Instead, the RBI may take the course independently, depending on unfolding the domestic economic environment. The RBI may focus more on local factors while making its decisions regarding monetary policy stance.

Moreover, the report mentioned that in the Indian banking system, loan advances are minutely connected with deposit receipts. It pointed out that loan growth leads to deposit growth; therefore, a slowdown in loan demand could result in an eventual decline in deposits. For deposit growth not to be slowing down, loan growth has got to be strong. That can happen only if India's investment cycle keeps buzzing, for it is investment that drives loan demand. Loans are given to businesses for expansion and other purposes, hence increasing deposits as more money circulates within the banking system.

The report suggests that loans cause deposits and hence a drop in loans will result in a decrease in deposits in the future. Consequently, a strong investment cycle is required to maintain stable credit and deposit levels in the banking sector. The SBI report stated that strong domestic growth and continued credit growth may prompt the central bank to keep interest rates stable in the near future. SBI stated in its report that the RBI's focus will remain on ensuring that India's economic momentum is sustained without being unduly influenced by global factors.