“…the challenge over the last two years has been that on the quantity side, I mean the raw material that the banks work with (deposits or cash reserves), that had started to become a problem,” Mishra said, referring to the tightening liquidity conditions impacting banks’ lending capacity.
The Reserve Bank of India’s (RBI’s) previous tight liquidity stance, combined with high loan-to-deposit ratios, had slowed down credit and deposit growth, creating a “downward spiral” in the banking sector.
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“If the banks start cutting loans or slowing down loan growth, it slows down deposit growth, and then the whole thing sort of goes into a downward spiral,” he noted.
However, the RBI has recently eased its stance on liquidity, which he believes will encourage banks to lend more freely.
As banks adapt to the “neutral” stance announced by the RBI in October, credit growth should see an upswing and the pressure on bulk deposit rates will gradually reduce, allowing banks to improve margins and expand lending.
“As the banking system understands that RBI’s liquidity stance has changed, and has changed for good…that’s when the credit impulse starts to improve,” he explained.
Although he doesn’t expect interest rate cuts until “April at the earliest,” Mishra views the easing of liquidity constraints as a key factor positioning banks for growth.
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He believes this shift could lead to increased lending and profitability, making banks, particularly private banks, a compelling investment choice as India moves toward a cyclical recovery.
Nifty Bank index has gained over 7% year-to-date and more than 20% over the past year.