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CD Ratio and Bank Credit Growth Rising Upwards
Dec 14, 2017

A high level of Capital Expenditure (capex) is believed to be a good indicator of economic growth. When we talk about the Indian economy, however, the capex has been on the decline since 2011. Unfortunately, when there were signs of a rising growth curve, disruptions like demonetization and GST came in.

However, the chart below offers a few reasons for hope. Credit-deposit ratio, a.k.a. CD Ratio has been steadily increasing over the past one year. This ratio shows how much a bank lends out of the deposits it has mobilized. This ratio was below 70% in November 2016, when demonetization resulted in a flood of deposits while lending slowed down.

Deposit growth and bank credit growth impacts the CD ratio. Bank credit growth rate is continuously improving and achieved 9.6% growth in November 2017. Although the base effect may have played a part in making, the current growth numbers look better. Nevertheless, the rise in bank credit growth will be positive for India's banking sector facing lower loan demand and severe capital constraints.

Over the past five years, private capex was stalled because of high leverage and weak capacity utilization levels. However, the above chart shows early signs of revival of capex cycle.

We are seeing the early signs of revival in the capacity expansion of the private sector. The pertinent question here is, which company is set to benefit the most from such capex plans?

It's neither a bank nor an engineering, cement, or steel company. Rather, it's a company that is riding the tailwinds of a megatrend that The India Letter team has identified.

What's more, the usually overpriced stock is currently near 52-week lows. Click here to know more about the company.

Data Source: CMIE

This Chart Of The Day was published in The 5 Minute WrapUp - Why You Shouldn't Shun Pharma Stocks...

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