Inflation, energy crisis, weak rupee may delay credit revival: Analysts

Revival of credit demand faces a triple whammy of unprecedented cost pressure, anemic volume growth, and scale-back in household budgets

The impact of the Ukraine-Russia war is being felt across geographies. India, on its part, will be hit by a contagion of high energy prices, sticky inflation, subdued consumption, and weaker-than-expected corporate earnings, caution analysts. All of this, they say, could delay the credit revival in the economy by at least two-three quarters.

Analysts at Credit Suisse say Indian credit growth may moderate, particularly in autos, SME and housing, on the back of rising oil and commodity prices and higher inflation. This, they said, comes at a time when there are signs of a pick-up in auto loans, with strong disbursements in Q3FY22. The brokerage has cut its FY24 loan book projections by 2-5 per cent.

"With rising crude prices and potential increase in fuel prices, we may see some impact on auto loan demand. As regards SME loans, rising commodity prices may lead to rise in input costs and impact profitability. Thus, banks may turn cautious on lending to this segment," Credit Suisse said in its latest report on the sector.

The Indian economy, on the other hand, had been impacted ahead of the pandemic. India’s gross domestic product (GDP) growth, according to Dhananjay Sinha, managing director and chief strategist at JM Financial Institutional Securities, had been faltering even before the pandemic hit; covid-19 and the Ukraine war have only exacerbated the issue.

"India's GDP growth has been anemic. It was 5.4 per cent in Q3FY22 and has been hovering around 2.5 per cent (adjusted for the volatility) post Covid. Going forward, the numbers will remain subdued as demand, especially in the rural economy, remains compressed and private capex seeing no pick up. Thus, healthy credit growth will be difficult to achieve," he says, adding that systemic bank credit growth will stay flat at 8-10 per cent over the medium-term.

Credit demand, Ajay Bodke, an independent market analyst, believes can be divided into two parts – retail and corporate. While corporates can pass on the increase in input costs, he believes the pass-on will be limited as it impacts volume growth.

"As regards households, people at the lower end of the pyramid have been downsizing their budgets, and are postponing their spending due to inflation. Revival of credit demand in India has, thus, been pushed down by at least two to three quarters as it faces a triple whammy of unprecedented cost pressure, anemic volume growth, and scale-back in household budgets," Bodke says.

That apart, there are supply-side bottlenecks that need to be dealt with as a fallout of the geopolitical crisis that could trigger a global economic slowdown. Ambareesh Baliga, an independent market analyst says sanctions against Russia will impact global economies and India will not remain isolated. With soaring input costs, margin compression, and fluid geopolitical scenario, he believes corporates could delay investments.

Inflation woes

High inflation owing to soaring energy prices is another concern, which, analysts say, is likely to force the Reserve Bank of India (RBI) to hasten the monetary tightening, making loans expensive for corporates and households.

Aditi Nayar, chief economist at ICRA suggests there are upside risks to domestic inflation and downside risks to growth. "While the MPC is likely to be averse to sacrificing growth on account of imported inflation at this stage, anchoring of inflationary expectations may warrant a less dovish tone of the policy document," she says.