SBI Caps report highlights optimistic outlook for the Indian economy, despite deteriorating global pitch

Jul 11, 2024

New Delhi [India], July 11 : The State Bank of India (SBICAPS) report, titled "Indian Economy: Maintaining Momentum on a Deteriorating Global Pitch," highlights an optimistic outlook across several sectors of the Indian economy. The report highlights a positive outlook for most of the sectors.

In the power sector, the report says persistent heat waves have led to high power demand. "Persisting heatwaves have led to record high power demand in the Northern region. Considering this, the Union has urged power companies to import equipment worth USD 33 bn to add 31 GW worth of capacity in the next 5-6 years, and there are talks that the National Electricity Plan could be revised to account for greater power demand."

It says that revenue collections from FASTag have shown a continued momentum and collections are up 11.2 per cent on a June 24(YoY) basis. The growth was driven by increased traffic and a 5 per cent upward revision of toll charges. The report however says road construction pace has slowed down in the first two months of FY25.

"Awarding pace is yet to pick up in FY25, while construction pace lags levels seen last fiscal. The NHAI has set its construction target for FY25 at 5,000 km (actual achievement of 762 km in 2MFY25), 22 per cent lower than FY24". Awarding contracts may have been slowed down in April-May 2024, because of elections and the imposition of the code of conduct.

However, the report is optimistic about growth in manufacturing and other Industrial activities as credit to Industry is showing healthy growth. "Industry credit surged 8.9 per cent y/y in May'24 with the broad-based offtake. Higher capacity utilisation leading to capex, pick-up in MSME credit, and increased infrastructure activity are expected to boost industry segment, potentially achieving high single-digit growth in FY25."

The report also acknowledges robust loan growth in the services sector, although the Reserve Bank of India's (RBI) crackdown has slowed loans to Non-Banking Financial Companies (NBFCs). But despite this, credit to areas such as trade, aviation, and commercial real estate has picked up.

Personal loans, however, are not growing as quickly due to past high growth rates and increased caution around unsecured loans. Nevertheless, other types of personal loans continue to grow strongly.

Overall, the report predicts credit growth to outpace overall economic growth in FY 2025 "Credit growth is expected to exceed nominal GDP growth in FY25, growing at 13-15 per cent amplified by secular long-term drivers such as buoyant economic growth, accompanied by formalisation, digitalisation, and premiumisation."

The report highlights that structural changes in savings patterns are impacting the quality and quantity of deposits to sustain credit growth. Bank deposit growth has slowed down from the decadal highs of FY24. Household savings are moving towards other avenues like mutual funds and life insurance schemes.

Margins of banks are getting squeezed because of a decrease in deposit growth and the recent hike in deposit rates. However, the SBICAPS report is optimistic that banks will manage and maintain their net interest margins (NIMs) nearly as strong as in FY 2024 as they were in FY 2023. In FY 2025, NIMs are expected to remain steady, with overall profits likely to be strong despite a slight moderation in return ratios.