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Note that credit growth last year came down substantially from March to September, so the next few months should see strong growth figures even if the absolute numbers come down. And in general we are still strong:

This post is written by Deepak Shenoy, at Capital Mind.

There will be a new data point tomorrow. Strong bank credit growth is good for the economy, but in a time of huge inflation it might not be considered good. Plus, a bulk of that credit growth will be in the BWA and 3G auctions recently (nearly 3% of overall figure) so we’ll have to see it move beyond 20%. A rate hike is expected on July 27th; at this point, high bank credit growth will only ensure that hike happens.

This post is written by Deepak Shenoy, at Capital Mind.

(My earlier reports had some incorrect data for the middle of 2009, apologies)

This isn’t very good because WPI’s overall index – released only once a month now – is hugely dependent on primary articles inflation. The Monthly index (till March):

Plus, remember, fuel prices are up and are likely to go up some more. Credit growth has now crossed 17%, and that’s again reaching territory where it could fuel even higher inflation.

And strangely, in this process, the 10-year bond yield has been going down! Meaning, more people are buying bonds. In the last one week, the 10 year bond has actually increased in value (which brings yields down)

The new benchmark 7.8% 2020 bond was only introduced two weeks ago, so there might be a flight to move from the old 10-year (6.35% 2010) to the new one, thus increasing the price of the new benchmark bond artificially as people buy it after selling the old bond. Still, the last two weeks have been seriously turbulent abroad, as government bonds got battered – seems like it had little impact on us.

And, looking at this it seems the market expects no interest rate hike despite high headline inflation numbers.

This post is written by Deepak Shenoy, at Capital Mind.

Banks were the strongest through the week. SBI and ICICI Bank led the pack, which HDFC Bank underperformed.

Bank lending went to 16.95% with data of April 9 announced this week. Fairly healthy, I would say:

Yet another 12,000 cr. auction went through smoothly – but the yields are going up. The 10 year has inched back to 8.06% from the under 8% levels we saw earlier this week. The 6 year bond is now trading at 7.64% which makes for a fairly steep yield curve.

(Tenor = actually the year of expiry, 10 meaning 2010 etc.) Basically everything above 2015 trades at 7.5% or more – the 2028 bond must have been a freak trade. This graph is borrowed from CCIL and is all wonky – I need to generate one myself.

Btw, Steep yield curves are good for banks; remember they borrow short and lend long, so if short term borrowing is cheap and long term is expensive…you get the picture.

This post is written by Deepak Shenoy, at Capital Mind.

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Is this because of the lower base effect in 2009? Not really, since we have grown 35% since 2008.

However you see it – credit growth is perking up. But this is the beginning of the rate hike cycle, whose effect we will only see after six months or so. Watch this space.

This post is written by Deepak Shenoy, at Capital Mind.

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To put things in perpective, we are still lower than May 2009, all the way up to 2007 and probably earlier as well.

Credit growth is great for banks and in general the economy, but helps promote inflation. Typically credit will grow at 2-3x the GDP growth rate if the assets thus bought are put to productive use. If credit is given to bubble assets – like real estate has been, or sometimes stocks – it tends to create default risk as well.

Unfortunately we don’t yet have a handle on how much loans are given to which sectors, but 16% is not “over-heated” growth, just a move back to the good old times.

This post is written by Deepak Shenoy, at Capital Mind.

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Credit growth is still low comparing the last four or so years, but it’s looking like it will scale up back to the 20% level soon. Awaiting another report in two days. What is happening then with inflation? It seems like Primary articles inflation is easing up, with the latest figure at a scary but lower-than-peak 15%. The Monthly full inflation figures are expected on the 15th.

This post is written by Deepak Shenoy, at Capital Mind.

Given that we’re starting to scale up organized credit, some monetary tightening is expected. Either a Capital Reserve Ratio (CRR) Hike or a Repo Rate hike is on the cards, and reflects in the sentiment of the market. However, if both don’t happen, expect a short term rally.

This post is written by Deepak Shenoy, at Capital Mind.

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It’s the lowest growth in five years though it’s starting to perk up. Banks are starting to lend again, it seems.  There are interesting regulations out there that will change the lending framework.

From bank lending direct, corporates may choose to borrow from the market through corporate bonds, a market that has seen very little focus. But that’s starting to change. RBI has just allowed repo on Corp bonds. Repo means Repurchase agreement, and is typically used as collateral while borrowing (“You buy these bonds from me, I repurchase from you at same price+interest”) So anyone with corporate bonds in their portfolio can use it for borrowing, starting March 2010. Why was it not allowed earlier, you might ask, and Tamal Bandyopadhyay writes on LiveMint about the history:

After serious irregularities in securities transactions that led to India’s biggest stock market scam in 1992, RBI came down heavily on such deals, but the restriction on repo existed even before the scam. A June 1969 government notification, under section 16 of the Securities Contract (Regulation) Act, 1956, prohibits any person from entering a repo deal without its permission. Globally, central banks use this short-term instrument to iron out excessive volatility in the money market. In India, too, RBI has been doing this and it is the sole authority to regulate this market.

In 1987, it even said that the units of the erstwhile Unit Trust of India, the country’s oldest mutual fund and a proxy for any sovereign paper, could not be used as collateral for repo deals. As the repo market grew phenomenally and there was rampant misuse of the facility, in 1988 RBI prohibited banks from entering into repo deals with non-bank clients.

In fact, the genesis of the 1992 stock market scam was a thriving repo market. Some banks used repos to understate their actual liabilities, by advising non-bank customers to lend them money by way of repos instead of placing the same in the form of deposits. There were others who first committed to borrow through repo deals and later invested the funds in securities. In many cases, commitments to repurchase or resell the securities were not even documented. RBI banned repo deals and barred banks from undertaking repos in government bonds and other approved securities with effect from 22 June 1992. Repos in treasury bills, however, were exempted from the prohibition. The restrictions were lifted in phases. In 1995-96, RBI partially reopened the market only for specified government securities, but only banks and primary dealers that buy and sell government securities were allowed to strike repo deals. At the second stage, in 1997-98, all government securities and treasury bills were made repoable and in 2003, mutual funds were allowed into this segment.

Now double-A and better rated corporate bonds are being made repoable but certificates of deposit, commercial paper, and non-convertible debentures of less than one-year tenure will not be eligible for undertaking repos.

Apart from this there are no FII limits on investing in corporate bonds (or it’s an obscenely huge number) – versus foreign investment in govt. debt being capped at a very low number ($200m per entity).

If the corp bond market develops, bank lending may not be a good enough measure. We’ll have to see the overall credit growth picture, which RBI may need to provide in their reporting more often.

This post is written by Deepak Shenoy, at Capital Mind.