Higher credit to services and personal loans may partly explain elevated core CPI inflation
Increased lending to consumers (personal loans) amid slowing investment suggests there is a demand slowdown. The RBI (Reserve Bank of India) is trying to orchestrate just this by hiking interest rates (to slow consumption growth and services price inflation). It might however, take much longer than expected, points out Nomura in a research note on bank lending. Hence, higher credit to services and personal loans may partly explain elevated core CPI (consumer price index) inflation.
Credit is one of the most important channels through which monetary policy affects aggregate demand and inflation. Hence, the divergence in the nature of bank lending has important implications including the one above. It could also, partly explain the divergence of manufacturing inflation (core WPI – wholesale price index – about 3% year-on-year) from services price inflation (core CPI – consumer price index - about8%). This is because, although manufacturing growth has tumbled, services demand remains relatively high, fuelled partly by credit, explains Nomura.
Credit growth by sector in the Indian banking system is shown in the chart below:
The research note says that after a sharp slowdown in 2011-12, credit growth has stabilised at around 15% y-o-y in the last year. However, although the headline number is stable, there are sectoral divergences. Specifically, credit growth to industry has steadily moderated, while loans extended to services sectors and personal loans have risen.
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