The Reserve Bank of India (RBI) Governor, Sanjay Malhotra, is scheduled to meet with top banking executives on January 27, 2025, marking his first major interaction since taking charge. This meeting comes ahead of his inaugural Monetary Policy Committee (MPC) review, set to take place from February 5 to 7. The agenda for the meeting focuses on addressing critical issues such as credit growth deceleration, banking liquidity concerns, and regulatory challenges.
Economic Growth and Liquidity Challenges
India’s banking sector is grappling with multiple challenges, including a slowdown in economic growth, fluctuating currency values, and a tightening liquidity scenario. Over the past fortnight, the banking system has recorded an average daily liquidity deficit of ₹1.75 lakh crore, creating a pressing need for immediate intervention. Governor Malhotra is expected to discuss strategies to improve money market liquidity and strengthen credit growth to support the broader economic landscape.
Credit and Deposit Growth Under the Microscope
The central bank’s latest data indicates a significant slowdown in both credit and deposit growth. As of January 10, 2025, bank credit rose by 11.5%, a sharp decline compared to 20.3% during the same period last year. Similarly, deposit growth slowed to 10.8%, down from 13.1% a year ago. This decline, exacerbated by the merger of HDFC and HDFC Bank, highlights the need for robust measures to boost lending and deposit mobilization.
Pushback on Draft Guidelines
The meeting is also expected to address pushback from banks regarding draft regulations proposed by the RBI last year. Key areas of contention include guidelines on loans for under-construction infrastructure projects, liquidity coverage ratio norms, and regulations governing the alignment of business activities between parent banks and their non-banking subsidiaries. Bankers are likely to advocate for relaxed norms, arguing that the current proposals could negatively impact their profitability and growth prospects.
Calls for a Repo Rate Cut
With India’s economic growth slowing to a two-year low of 5.4% in the July-September 2024 quarter and inflation remaining relatively controlled at 5.22% in December, economists are urging the RBI to consider a 25-basis-point cut in the repo rate. Currently at 6.5%, the repo rate has remained unchanged since February 2023. A rate cut could provide much-needed stimulus to the economy, particularly as inflation hovers within the RBI’s comfort zone of 2% above or below the 4% target.
A Historical Perspective
Governor Malhotra’s predecessor, Shaktikanta Das, often held biannual meetings with bank CEOs to gather feedback on sectoral developments and policy decisions. This upcoming meeting reflects a continuation of that tradition, with a renewed focus on addressing pressing challenges in the banking system and aligning regulatory measures with market realities.
As India navigates a complex economic environment, the outcomes of this meeting will be closely watched by stakeholders across the financial ecosystem. Decisions made here could shape the trajectory of credit growth, liquidity management, and overall economic stability in the months ahead.
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