RBI unlikely to cut rates as India's growth rate exceeds potential output: SBI report

The report suggests that domestic economic conditions are the primary factor influencing the central bank's decisions. With India experiencing strong economic growth, which probably exceeds its long-term potential output, the case for maintaining current interest rates is strong, and the RBI may choose to maintain them rather than lower rates.

“Domestic conditions remain paramount and stagnation prevails with stronger than expected output growth,” the report said.

The SBI report also indicated that the RBI may not follow interest rate developments in the United States. Instead, an independent approach is likely to be taken based on the emerging domestic economic situation. While global economic factors, including US interest rates, often influence financial markets, the RBI may focus more on local factors while deciding its monetary policy stance.

“The RBI may distance itself from interest rate developments in the US and take an independent view on domestic rates based on emerging conditions,” the report said.

Additionally, the report highlighted a significant relationship between credit and deposits in India's banking system. It states that credit growth impacts deposit growth, meaning that a decline in credit demand may lead to a decline in deposits in the future. Therefore, it is important for credit growth to remain strong to ensure that deposit growth does not falter.

This can happen only if India's investment cycle remains active, because investment increases demand for credit. Businesses and industries need loans to expand, and this leads to an increase in deposits as more money flows through the banking system.

“In other words, credit Granger causes deposits and so a decline in credit will lead to a decline in deposits,” the report said.

Therefore, a strong investment cycle is essential to maintain healthy credit and deposit levels in the banking sector.

While some might have expected the RBI to lower rates given global growth, the SBI report suggests that strong domestic growth and the need for continued credit growth may push the central bank to keep rates steady in the near term. It appears that the RBI's focus is on ensuring that India's economic momentum continues without being overly influenced by global factors.