By Nirmal Bang
Bank credit for the fortnight ended 1st January 2010, grew by 13.7% on a YOY basis as against 23.8% in the corresponding period of the previous year. During the period, banks disbursed approximately Rs. 79,514 crores as loans which mark the highest fortnightly disbursal in FY 2009]10. On a YTD basis, credit growth remained sluggish at 9% in the current fortnight as compared to 13% in the corresponding period of the previous year. Even though, credit off]take has witnessed a sharp rise in the current fortnight, in order to judge the revival of credit growth, it is viable to witness the growth in a few more fortnights ahead.
Historically, second half of the year accounts for major proportion of the total bankfs credit disbursal. Going forward, with IIP number expected to improve and Indian GDP outlook looking positive, we expect credit growth to improve in last quarter of the year. However, we believe that lower credit demand from corporate sector is likely to restrict the overall credit growth to reach the central bankfs target of 18% growth for current financial year; as Indian banks will have to disburse additional Rs. 2,47,806 crores in the period from January to March 2010. Components of credit growth (Schedule Commercial Banks)
Deposits for the fortnight ended 01 January 2010, increased 17.6% on a YOY basis as compared to 21.4% in corresponding period previous year. On a fortnightly basis, bank deposits saw an addition of Rs.82,769 crores. On a YTD basis, banks have mobilized Rs. 4,34,218 crores during April to December 2009. Credit deposit ratio stood at 70.8% at the end of the current fortnight as compared to 73.3% a year ago. Credit deposit ratio is witnessing an increase after a decline in the period from March to November 2009, on account of increase in credit off]take which is expected to continue ahead in the coming quarters.
Investments for the fortnight ended 01 January 2010, increased by 22.8% on a YOY basis as compared to 20% in the corresponding period previous year. On account of low credit growth, banks are parking more funds in government securities and other approved debt securities thereby leading to a rise in Investment to Deposit Ratio (IDR). On a fortnightly basis, investments increased by Rs. 67,900 crores. IDR continues to soar at 33.1% levels in the current fortnight. However, going forward, we believe that with credit growth expected to improve ahead, trend is set to reverse resulting in IDR to witness gradual downturn.
Money Supply and Inflation
Growth in M3 increased by 17.2% on a YOY basis in the week ended 25 December 2009. Among the sources of money supply, net bank credit to commercial sector increased by 11.2% on a YOY basis as compared to 22.6% in the corresponding period previous year. Other components also showed an increase on a YOY basis, with net bank credit to government increasing the maximum (35.4% on a YOY basis). However, on a fortnightly basis money supply decreased by 0.2% or Rs. 9,608 crores.
WPI inflation rose by 7.31% for the month of December 2009 as compared to corresponding period in the previous year. Increase in food prices reflected in a 14.88% rise in primary goods coupled with low base effect continues to exert an upward pressure on inflation. Going forward, we expect RBI to undertake initial steps with respect to easing of monetary policy, on the back of rising food prices, through rise in CRR by 50 bps in the meeting to be held in January 2010.
Presence of excess liquidity in the system has been reflected in increased transactions under reverse repo window of the Liquidity Adjustment Facility (LAF). Indian banks have been continuously parking funds with RBI under the reverse repo window on a large scale.
Indices of Industrial Production
The Indices of Industrial Production (IIP) for the Mining, Manufacturing and Electricity sectors for the month of November 2009 stand at 192.9, 322.6, and 223.5 respectively, with the corresponding growth rates of 10.0%, 12.7% and 3.3% as compared to November 2008. The cumulative growth during April-November 2009]10 over the corresponding period in the three sectors have been 8.3%, 7.7% and 6.1% respectively, which moved the overall growth in the General Index to 7.6%.
As per use]based classification, the sectoral growth rates in November 2009 on a YOY basis are 6.0% in Basic goods, 12.0% in Capital goods and 19.0% in Intermediate goods. The Consumer durables and Consumer non]durables have recorded growth of 37.0% and 3.0% respectively, with the overall growth in Consumer goods being 11.1%. Overall, the economy has witnessed impressive industrial growth primarily on the back of manufacturing sector. In manufacturing sector, strong performance has been witnessed especially in capital goods and consumer durables industries.
Monetary Rates
On account of excess liquidity, call money rates have remained on the lower bound of the LAF corridor. In addition, deposit rates have also touched bottom in the range of 6.00% to 7.50%. Going forward, we expect that on the verge of rising inflation and excess liquidity in the economy, RBI might hike CRR by 50 bps in the upcoming meeting to be held in January 2010. In addition, steps taken by China by increasing Cash reserve ratio by 50 bps could fuel the anticipated hike in monetary rates.
