10

Oct

RBI subprime alert!

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New Delhi, 10, October 2023

IRB subprime alert!
PERSONAL LOANS, DEFAULTS RISE

By Shivaji Sarkar


What would sway Indian politics, RBI monetary policy or caste census? Normally it should be the RBI steps but elections may be guided more by caste factor as people forget that the castes have for decades been denoting socio-economic status, aspirations rather than wry warnings of one who observes economy from the close quarters.
The RBI has come out with certain facts that may not be palatable to the overall economic conditions, including a veiled subprime alert as personal loans and defaults rise. It held back repo rates at 6.5 percent amid continuous rise in prices. The bank indicates holding of rates till the general elections. In other words, it candidly says that there is little opportunity to cut the rates. This means the cost would continue to be more for the borrowers whether individual or corporate.  
Do Bihar caste census figures matter in such a scenario? Inflation at 6.83 percent as per August 2023 figures less than the highest of 7.44 percent in July is beyond the RBI toleration limit of 6 percent. But hawkish RBI is targeting for 4 percent. 
It is good news if the target is achieved but if not, post elections rates could spiral. The 112 extreme backward castes and other economically weaker classes, who are covered by the Ujjwala gas schemes may feel happy that the government has reduced the LPG cylinder prices by Rs 300. 
Correspondingly the price of commercial cylinders has been raised by Rs 300. It is a cross subsidy. The gas companies lose nothing but cost of production on a number of items to go up. It will jack up the prices and overall cost of living. The subsidy on the gas would be substituted by higher realisations from the market. Technically it may keep oil companies’ coffers balanced but the market costs can upset the RBI’s calculations. It can make markets tizzy as RBI’s future inflation projection at 5.2 percent may be off the mark. The reaction of the weaker sections may not be easy to predict. The happiness and hardship quotients are not equally balanced. In such situations they may take decisions as per caste conglomerations, difficult to predict politically. It can stoke many speculations and make the work of psephologists difficult.
Though still RBI moves may not be exactly on the poll plank but it may ultimately impact the course.  However, the cushion RBI has provided edges out to almost eight months, far beyond the five state elections that are to close in December. Next monetary policy moves may be more critical.  
The situation is contrary to the US. The Federal Reserve has been firming up rates. Another rise may be in the offing as US jobs swelled, unemployment rate comes down to 3.8 percent and wages rose at a modest rate. It is not a good indicator for Indian economy. Each US rate surge sees flight of capital from the rest of the world. It means investments elsewhere would plummet. India needs to feel concerned.
The RBI finds that already its government bonds, G-Sec, sales are in over supply and the 10-year-bonds get low returns. The RBI says it is limiting operations to manage liquidity and not yield. Practically, the yield differential between US and G-Secs have fallen to low levels. This could have negative impact on the strength of the rupee-dollar exchange rate. It is already at a low of Rs 83.25 to the dollar. The bank’s open market operation (OMO) bond prices are falling even as US 20-year bonds are firming. Managing the currency rates itself is becoming tough.
The housing sector has seen hopes in rate hold. It hopes that more units could be sold. That is not solace for RBI Governor Shaktikant Das, He is concerned over “certain components of personal loans recording very high growth. These are being closely monitored for signs of incipient stress”. 
On annual basis personal loans contributed 37.7 percent incremental bank credit in August 2023, according to the monetary policy committee (MPC) report or over Rs 40 lakh crore against Rs 33 lakh crore in 2022 and Rs 29 lakh crore in 20

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