Recent policy tweaks from the RBI should help at the margins to boost bank lending, which has been moribund over the past few years. Most obviously, the 25bp rate cut this month means that the repo rate has now fallen by 150bp since January 2015. In addition, given that interbank rates have been dropping recently, regulatory changes such as the switch to the use of the marginal cost of funding to calculate lending rates should boost credit. But these changes are only likely to have a small impact on the ailing banking sector, which remains burdened by a build-up of bad debt. As we have argued previously, large-scale capital injections, increased private participation and a new bankruptcy code are all required to get banks lending again. The onus here lies with the government. Until progress is made, the banking sector looks set to remain a constraint on India’s growth prospects over the medium term.
Become a client to read more
This is premium content that requires an active Capital Economics subscription to view.
Already have an account?
You may already have access to this premium content as part of a paid subscription.
Sign in to read the content in full or get details of how you can access it
Register for free
Sign up for a free account to:
- Unlock additional content
- Register for Capital Economics events
- Receive email updates and economist-curated newsletters
- Request a free trial of our services