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Loan growth in India is at a three-year high and seen inching up further as economic activity gains traction but a much slower growth in deposits could send banks scurrying for funds and prompt deposit rate increases, say analysts and bankers.

Deposit growth has floundered as high inflation has resulted in less savings, as would be depositors are choosing to put money into shares and mutual funds in search of better returns, said Madan Sabnavis, chief economist at state-owned lender Bank of Baroda.

In order to bulk up its deposit growth, country's largest private lender, HDFC Bank has started a short-term drive to beef up its deposits by offering a higher rate of interest on non-resident accounts held by Indians living abroad. Analysts believe that other lenders may also follow suit with similar moves.

As surplus funds in the system get slowly pulled out by the central bank measures, banks' margins and their profitability could come under pressure, forcing them to not just raise deposit rates, but also possibly go to the more expensive capital markets to raise funds needed to meet credit demand.

That could worry investors, already in retreat due to global factors, and send banks' stock prices further down.

Rating agency ICRA said in a note last week that it expected banks "to aggressively start chasing deposits, which will also lead to higher deposit rates."

Indian banks' deposit growth, currently at 9.8%, has stayed in single-digits for a large part of the last 14 months, while credit growth - having touched a record low of 5.6% in FY21 - has nearly tripled to 14.4% in the fortnight to July 1st.

Retail loan growth which includes personal loans, mortgages, auto loans has steadily been growing at a faster clip and continues to outpace corporate credit.

"Personal loans have been the main growth driver for the Indian banking sector during the past few years, as corporate lending has stalled due to NPAs (non-performing assets) and deleveraging," CARE Ratings said in a report earlier this week.

Going ahead, while the prospects for credit growth appear promising, high inflation and rate hikes may cast a shadow, CARE said.

Banks' credit-deposit ratio - currently 73% of banks total deposits are being lent out - has been steadily rising, indicating that their earning capacity is also improving.

But as credit demand picks up, there could be pressure on funding unless deposit growth matches up

In the next few months if the trend continues then we will have no other option but to raise deposit rates because the market conditions are also not very favourable for us to go to the market to raise growth capital," said a senior executive at a state-owned bank.

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The Indian rupee has strengthened against the British Pound in 2022 though it has depreciated against the US dollar, Finance Minister Nirmala Sitharaman said on Tuesday.

Global factors -- such as the Russia-Ukraine conflict, soaring crude oil prices and tightening of global financial conditions -- are the major reasons for the weakening of the Indian Rupee against the US Dollar, she said in a written reply to the Rajya Sabha.

"The British Pound, has weakened more than the Indian rupee against the US dollar and therefore, the Indian rupee has strengthened against the Pound in 2022," she noted.

The nominal exchange rate is only one of the factors that impact an economy, the minister said.

The depreciation of a currency is likely to enhance the export competitiveness, which in turn impacts the economy positively while it is also likely to impact the imports by making them costlier.

In reply to another question, Sitharaman said GST rates or rate slabs applicable on goods and services are prescribed on the recommendations of the GST Council.

GST Council has not made any recommendation for change in the existing GST rate slabs so far, she said, adding that a Group of Ministers (GoM) has been constituted by the council in its 45th meeting held on September 17, 2021.

One of the terms of reference of the GoM is to review the current rate slab structure of GST, including special rates, and recommend rationalisation measures, including a merger of tax rate slabs, required for a simpler rate structure in GST.

Regarding Centrally Sponsored Schemes (CSS), she said a new procedure for the flow of funds to the state governments was introduced with effect from July 1, 2021.

As per the revised procedure, each state has to notify a Single Nodal Agency (SNA) for each CSS and open a bank account of each SNA, she said in another reply.

The CSS funds flow from the Centre to the consolidated fund of the respective state and further to the bank account of SNA, she said.

The new procedure has brought more transparency to the availability of CSS funds in state treasuries and bank account of SNAs, and this has led to better monitoring of the utilisation of funds and availability of funds with SNAs for CSS implementation.

The decade-long dream run of low inflation for emerging economies in Asia is about to end and there will be consequences, warned Moody’s Analytics, the research arm of the rating agency Moody’s Investor Services Ltd.

“Starting with a slow creep and swirling into a Category 5 hurricane, inflation will make itself felt across the region, landing later than in the rest of the emerging world and proving only slightly less disruptive,” Moody’s said in a report.

For more than a decade, consumer price inflation in emerging Asian economies such as Thailand, Vietnam, Malaysia, the Philippines and China have remained low despite short episodes of sharp increase in the prices of commodities globally.

“This is partly due to gains on the supply side of the economy, with growth in labour productivity helping the region absorb the pressures of a rising consumer class,” the report said. Local subsidies given by governments also helped offset the impact of global price hike.

Most of these economies have current account surpluses and export more than they import. The outcome of this is higher domestic savings which find its way into offshore markets.

All this has changed now. Moody’s believes that the rise in inflation is mostly demand-led for emerging Asian economies. Excluding China, Asian countries have reported a stellar rebound in their economic growth in the first six months of 2022. This means demand impulses have come back with force, showing up in price increases. Needless to say, supply hasn’t kept pace which has accelerated the price increases.

“Now that the reopening process in India and South East Asia is nearly complete, the supply shock from the invasion of Ukraine and lingering supply-chain bottlenecks have crashed into demand,” the report noted. The far reaching effects of the Russia-Ukraine war on food, oil, metals, engineering goods and others have begun to show across economies.

The rising inflation pressure has forced the central banks across Asia spring into action with rate hikes. Most have effected one or more hikes so far but Vietnam, Thailand and Indonesia are yet to bite the bullet.

Moody’s pointed out that unlike other economies such as those in Latin America, emerging Asian countries are underbanked. This blunts the impact of the rate hikes by central banks on the economy somewhat. It also means that the central banks will see the effects after a long lag and therefore need to be patient.

The casualty of rate hikes would be the economic growth, Moody’s said. It expects the Asian economies to see a deceleration in economic growth this year. The gains from economic growth would be limited in terms of employment and income generation, the report said.

Haryana Chief Secretary Sanjeev Kaushal has directed all deputy commissioners in the state to expedite pending cases related to Right of Way (RoW) permissions for installation of towers for mobile and internet service.

He was holding a review meeting on the issue of RoW with all the Deputy Commissioners through video conferencing here on Monday.

Kaushal gave special directions to the Deputy Commissioners of Rohtak, Ambala, Kaithal, Karnal, Sonipat, Panipat, Yamunanagar, Nuh, Hisar and Kurukshetra districts, where the percentage of cancellation of applications for RoW is high.

He said that all those service providers may also be directed to ensure that they submit their documents and prescribed fee within seven to 10 days so that the pending cases can be completed at the earliest.

RoW permissions are needed for overhead and underground telecom infrastructure, including laying of telecom fiber.

Kaushal said that the state government is committed to increase the communication and mobile connectivity infrastructure.

In the districts where there is still any problem related to mobile signal and internet connectivity, the DCs were directed to contact the Department of Telecommunications for immediate installation of telecom towers in those districts, according to an official statement here.

It was informed in the meeting that more than 5,700 applications have been approved in the districts related to RoW permissions.

Presently 1,091 cases are pending. There are some cases where the service providers have not submitted the required documents or in some cases the prescribed charges have not been paid.

It was informed in the meeting by the officials that some cases are pending due to non-submission of 'radiation' certificates.

The chief secretary apprised the deputy commissioners that according to the policy of communication and connectivity infrastructure, radiation certificate has to be submitted within 30 days of installation of tower, so there should not be any delay in grant of permission due to this certificate.

In the meeting, the Director General (Telecom), Department of Telecommunications, Ministry of Communications, Government of India, connected through video conferencing and said that they will establish contact with the service providers and ensure that they get the required documents submitted within the stipulated time as well as pay the fixed charges, as per the statement.

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Nearly 10,000 micro, small and medium enterprises (MSMEs) shuttered from 2019 to 2022, according to a parliamentary response on July 25.

According to data from the erstwhile Udyog Aadhaar and Udyam, 9,667 MSMEs closed since 2019, Bhanu Pratap Singh Verma, the minister of state for MSMEs said in a written response to a lawmaker’s question in the upper house of parliament.

ALSO READ: Govt making necessary policy changes to encourage MSME sector: PM Modi

This compares with 400 MSMEs that closed during 2016-2019, the minister added.

India’s pandemic-hit economy is recovering but the informal sector, which has come under significant financial stress and has lost market share to larger firms, is lagging.

The office of Delhi's lieutenant governor on Sunday said that the state government's data on excise revenue collection is wrong. The Delhi government said that its excise revenue increased by Rs 1,484 crore in the Q1FY23, owing to the implementation of the revised excise policy, according to a report in Times of India.

This came two days after the LG's office recommended a probe by the Central Bureau of Investigation (CBI) into the Delhi government’s excise policy.

The excise revenue of the Delhi government in the first quarter of the current fiscal year remained flat compared to 2019-20 despite a steep rise in whiskey and wine sales, argued the central government's sources. According to the report, data from FY21 and FY22 were not taken in comparison due to the Covid-19 lockdown and the second wave of coronavirus, respectively.

While wine sales in Delhi are estimated to have risen 87 per cent, whiskey and beer sales witnessed an increase of 59.5 per cent and 5.5 per cent, respectively, the Centre's sources told Times of India as they added that the mismatch is "stark and inexplicable."

“Of the Rs 1,484 crore being touted as excise revenue, Rs 980 crore are refundable security deposits of the vendor licensees. In fact, in the last five financial years, 2017-18 to 2021-22, the revenue earned by the Delhi government through liquor sale has come down by a staggering Rs 567.98 crores,” The Hindustan Times reported, quoting an official.

The Delhi government last year in November had lowered the VAT on liquor from 25 per cent to 1 per cent. However, now, the regime has been changed and excise and VAT were merged for the calculation of reserve licence fee.

After factoring in the numbers for the last fiscal year including the security deposit, the licence fee component for liquor may add up to nearly Rs 4,500 crore, and along with VAT, the collections are estimated at Rs 5,741 crore, sources told TOI. This collection is nearly Rs 568 crore lower than the collections five years ago as in FY18, it was pegged at Rs 6,309 crore.

The central government's sources told TOI that the fall in revenue is difficult to explain.

India would be lucky if its Gross Domestic Product (GDP) grows by 6 percent in the financial year 2022-23, according to Pronab Sen, head of the Standing Committee on Economic Statistics.

Sen, formerly the chief statistician of India, said while the Reserve Bank of India (RBI) may not go “overboard” with interest rate hikes, the elevated uncertainty levels could damage growth.

“All of these 7 percent-plus growth estimates that are floating around, you really have to rubbish all of that. We would be lucky if we do 6 percent this fiscal,” Sen told Moneycontrol in an interview in Delhi.

Last week, Nomura cut its growth forecast for India for 2023 to 4.7 percent from 5.4 percent.

According to Sen, India’s potential growth rate has fallen to around 5.5 percent.

Fiscal support needed

In a scenario where the monetary authority is applying brakes to curb red hot inflation, Sen feels the government must ensure fiscal support to make sure the economy does not tip over into a slowdown.

“Once you start having monetary tightening, the dangers of growth retraction go up. You don’t want growth to go down too fast because if it does, there is always a tipping point after which the contractions start getting a momentum of its own and it just gets worse after that,” Sen said.

“It becomes incumbent on the fiscal policy to make sure that the economy doesn’t go over that tipping point.”

The RBI has raised the policy repo rate by 90 basis points so far in FY23 to 4.9 percent to combat elevated inflation levels, with another rate hike expected next month in August.

One basis point is one-hundredth of a percentage point.

The latest Consumer Price Index (CPI) inflation print for June, at 7.01 percent, met market expectations. However, it was the 33rd month in a row that it came in above the medium-term target of 4 percent.

Sen expects the repo rate to be raised to as much as 5.5-6 percent from 4.9 percent currently as the RBI continues its fight against high inflation.

“The repo rate should be marginally above where you want the inflation to be… getting inflation down to 4 percent is not going to happen in the near future, but getting it down to 5.5 percent can happen. So, you just take it there and leave it there and wait for inflation to come down,” he said.

Asia’s third-largest economy, faced with a cost-of-living crisis, is barely above its pre-pandemic level and faces headwinds from elevated commodity prices, a widening current account deficit (CAD), and a likely recession in the West as central banks world-over quicken monetary tightening to combat multi-decade high inflation.

“Some of the (slowdown) is bound to happen, and should happen, otherwise monetary policy might be ineffective. So, the responsibility now should be of fiscal policy to make sure that doesn’t happen because the RBI has no choices left,” Sen added.

How much support the Centre can offer is questionable. Pandemic-related costs, loss of revenue, and cleaning up of the government’s books saw the central government fiscal deficit jump to 9.2 percent of GDP in FY21, before easing to 6.7 percent in FY22.

The Budget has targeted a fiscal deficit of 6.4 percent for FY23. But Finance Minister Nirmala Sitharaman has a tough task on her hands as expenditure on food subsidy has been raised, while earnings have been hit by excise duty cuts and a lower dividend from the RBI.

Investment question

Key to the Indian recovery is investments.

The pandemic has led to the Indian corporate sector garnering a larger share of the economy as the so-called micro, small, and medium enterprises (MSMEs) were battered by the second wave of the pandemic.

“If you look at corporate data, there is fantastic recovery, better than anywhere else in the world. But if you look at it as a whole, the MSMEs are still in very, very bad shape,” Sen said.

According to Sen, the spurt in investments seen in the second half of FY22 is not sustainable as that reflected a rush to finish projects, with the past lockdowns leading to a bunching of investments.

“These were projects that were already on the ground, the finances were tied up, everything was in place. So, there was a huge rush to complete that, which is why you saw a bulge in capex in the second half of the last fiscal year,” Sen said.

“Will the corporates want to invest more now? Do they have the confidence, particularly when you are looking at a global recession staring you in the face by the end of this year and next year?”

Sen’s doubts are reflected in data. While the government has highlighted that private sector project announcements are high, not all of the money is finding its way out of companies’ pockets. According to the RBI’s latest Financial Stability Report, released in late June, companies have been sitting on increasingly large piles of cash.

Let rupee ease

Meanwhile, Sen is not too worried about the rupee, which has plummeted to new lows recently.

According to Sen, the rupee probably needs to continue depreciating as it continues to be overvalued when seen against currencies other than just the US dollar.

As per latest data, the rupee’s real effective exchange rate (REER) against a basket of 40 other currencies stood at 104.18 in June.

A REER of more than 100 is indicative of overvaluation of the currency.

“The thing is, do you actively manage the deprecation, that is, do you force the rupee down or do you just allow it to happen? My opinion is to just let it happen if it happens. Just manage the volatility,” Sen said.

On the CAD likely hitting 3 percent of GDP in FY23, Sen said that didn’t warrant an overreaction given the overall “unusual situation”.

Sen was appointed to head the newly-formed Standing Committee on Economic Statistics in late 2019 to improve the quality of India's official data amidst criticism of political interference.

The RBI currently sees India's GDP growth cooling to 7.2 percent in FY23 from 8.7 percent in FY22. However, economists have lowered their forecasts in recent weeks due to the impact of the Russia-Ukraine war and the tightening of financial conditions by the RBI to lower inflation.