Rising rates, base effect may slow down growth

Multiple interest rate hikes and the base effect may moderate year-on-year in the medium term, even as an economic upturn may keep demand for loans robust in the next few quarters.

According to Soumya Kanti Ghosh, group chief economic advisor of SBI, the interest cost on retail and micro, small and medium enterprise MSME consumers will increase to around Rs 68,625 crore due to the rate-hike cycle. A 1 basis point bp increase in the repo rate will have a combined impact of Rs 305 crore on consumers, both retail and MSMEs. According to Ghosh, demand may be affected by this, according to a research note.

With 47 per cent of the loans benchmarked to the external benchmark lending rate, the increase in the repo rate to 225 bps including Wednesday's 35 bps hike will increase interest cost further, he added.

Sanjay Agarwal, senior director, CARE Ratings, said lending rates in the banking system are still below pre-pandemic levels. The growth trend will continue for some more quarters.

The benefit of having a lower base will be lessened in the next few months, leading to a lower growth rate.

He said that a slow down in global growth could affect credit growth due to rising interest rates, interminable pandemic restrictions in China and multiple rate hikes in India.

In October of this year, interest rates stayed strong, despite a strong rise in interest rates. Growth was also broad-based across segments and likely to remain strong in the rest of 2022 -- 23.

Retail and non-banking financial companies are expected to be key growth drivers for the fiscal year. A senior private sector bank executive said that credit growth will slow down in normal course due to rate hikes in nine to 12 months and the base effect. The actual demand for credit will depend on expectations around asset prices and capacity to service loans.