Indian banks' body to seek easing of proposed norms for retail deposits

MUMBAI, Aug 31 (Reuters): The Indian Banks' Association is likely to ask the central bank to reduce the amount of additional funds lenders will need to set aside against some retail deposits and also seek a delayed and gradual implementation of the proposal, seven sources told Reuters.
The Reserve Bank of India (RBI) in July proposed an additional 5 per cent 'runoff' requirement on retail deposits enabled with internet and mobile banking facilities to bolster the liquidity resilience of banks.
The RBI had sought feedback on the proposal until Aug. 31, after which it would finalise them for implementation from April 2025.
The Indian Banks' Association is likely to seek an extension of the deadline for giving feedback "as the process is taking some time", a senior official aware of the development, said.
The association did not immediately respond to an email seeking comment.
"Our primary suggestion is to reduce the runoff per centage to 2 per cent or a maximum of 3 per cent, as 5 per cent is not feasible," a treasury official said. "That too should be levied incrementally... instead of at one go."
Lenders can experience 'runoff' when there are heavy withdrawals, which impact banks' liquidity coverage ratio. Under the liquidity coverage ratio, banks are required to hold a proportion of deposits in high-quality assets such as cash, central bank reserves and federal government bonds.
If the RBI implements the draft norms as proposed, there would be a sudden rush to buy government bonds, traders said. Market estimates pegged the additional demand for government bonds between 2 trillion rupees to 4 trillion rupees.
The banks' association is also expected to recommend the RBI allow funds parked with it under the cash reserve ratio to be counted against banks' liquidity coverage needs, all the seven sources said. The sources requested anonymity as they are not authorised to speak to media.
Meanwhile, India's economic growth slowed to 6.7 per cent year-on-year in the April-June quarter as a decline in government spending during national elections weighed, data showed on Friday, but it remained the world's fastest-growing major economy.
The rise in gross domestic product was less than a 6.9 per cent expansion forecast by a Reuters poll, and compared to 7.8 per cent growth in the previous quarter.
Still, it was faster than 4.7 per cent growth in China, Asia's biggest economy, in April-June, and India's slowdown is expected to be temporary as economists forecast that easing inflation and a pickup in government spending will shore up growth in the coming months.
V. Anantha Nageswaran, India's chief economic adviser, said growth momentum remained strong backed up strong investment demand and upbeat business sentiments.
"In the medium term, the Indian economy can grow at a rate of 7 per cent plus on a sustainable basis if we can build on the structural reforms undertaken over the last decade," he told reporters after the release of data.
Prime Minister Narendra Modi has taken several steps to boost the economy since recent national elections, in which his Bharatiya Janata Party (BJP) failed to win an outright majority and is having to rely on allies to run the government for the first time in a decade.
The Gross Value Added (GVA), seen by economists as a more stable measure of growth, increased by 6.8 per cent in April-June from a year earlier, compared to 6.3 per cent in the previous quarter.
Upasna Bhardwaj, chief economist at Mumbai-based Kotak Mahindra Bank, said the GDP numbers were softer than expectations but the GVA remained firm with non-farm growth holding up.
"We retain our GDP growth expectations of 6.9 per cent in 2024/25, aided largely by rural demand and government spending while watching closely the likely fatigue in urban demand, private capex and pace of global slowdown," she said.
Consumer spending, which constitutes about 60 per cent of GDP, rose to a seven-quarter high of 7.4 per cent in April-June from a year earlier, compared to 4 per cent in the previous quarter. Capital investments also rose by 7.4 per cent compared to 6.5 per cent in the previous quarter.
However, government spending in real terms fell 0.2 per cent year-on-year in April-June, compared to a 0.9 per cent rise in the previous quarter, data showed.
Manufacturing, which makes up about 17 per cent of India's GDP, grew by 7 per cent year-on-year in the April-June quarter, compared to an 8.9 per cent expansion in the previous quarter.
Agricultural output rose 2 per cent year on year in the same period, up from 1.1 per cent in the previous quarter. Plentiful rainfall this year is expected to enhance farm output, rural incomes and consumer demand, a trend reflected in increased sales of two-wheelers and tractors in July.
Despite strong growth relative to other economies, India faces challenges in job creation and more inclusive economic growth. These issues have affected real wages, household consumption among lower-income groups, and private investments.
"Government capital expenditure will continue to be a major pillar of growth as in the previous year," said Suman Chowdhury, economist at Acuite Ratings, citing infrastructure spending.
The government has stepped up spending with last month's $576 billion annual budget, which includes billions of dollars for affordable housing and rural jobs, to stimulate economic activity.
Economists anticipate that easing retail inflation could lead the central bank to cut its policy rate later this year, potentially boosting household consumption and supporting private investments.