Get More Info

  • Views Search

    Portfolio Tracker
  • : Banking: To take a breather

    Banking: To take a breather

    The scurry of activities and developments in the Indian banking sector in FY07 were manifested in the government's and the Reserve Bank of India's (RBI) efforts of reconciling the twin objectives of facilitating economic growth and containing inflation. Both the governing bodies had their share of surprises in this fiscal. While the economic (GDP) growth of 9.2% in 1HFY07 was way beyond the targeted 7.0% to 7.5% rate, inflation (measured in terms of wholesale price index, WPI) remained stubborn despite lower crude prices and touched a high of 6.7% in February 2007 (RBI's target is 5.0% to 5.5%). The monetary policies, therefore, were carefully calibrated to tame inflation without hurting the gathering growth momentum.

    Flush with liquidity
    Money supply (measured in terms of broad money, M3) grew by a whopping 21% YoY until January 2007 on the back of 17% YoY growth during the corresponding period of FY06. This was primarily funded by bank credit to the commercial sector (grew 27% YoY) and accretion to the net foreign exchange assets of the banking sector (also grew 27% YoY). It must be noted that with money supply growing faster that the nominal GDP in recent years, the velocity of money (ratio of nominal GDP to average M3 stock during the year) has declined from 1.62 in FY02 to 1.47 in FY05 and 1.45 in FY06.

    RBI: Walking the tight rope
    The RBI's monetary policy stance was attuned to blend a prohibitive interest rate environment with consistent growth momentum and price stability. The focus was on credit quality and supporting the export and investment demand in the economy. The RBI's deliberations were aimed at maintaining macroeconomic stability in general and responding swiftly to evolving global developments in particular.

    The quarterly monetary reviews also spelt out the following three issues:

    • demand pressures appearing to have intensified, reflected in rising inflation, high credit growth, elevated asset prices, strains on capacity utilisation and widening of trade deficit;

    • increased supply-side pressures evident from rising prices of primary articles; and

    • the need of the monetary policies to contend with lagged response of productive capacity and infrastructure to the ongoing expansion in investment.

    Rates on the spring board...
    With buoyancy in credit growth and corresponding shortfall in deposit accretion, the credit to deposit ratio in the banking sector shot up from 65% in January 2006 to 74% in January 2007. To bridge the widening gap between incremental credit disbursal and deposit accretion, banks chose to offload their excess SLR portfolio (above 25%). The monetary tightening initiatives by way of hike in the CRR (cash reserve ratio), repo and reverse repo rates also culminated in banks across the board raising their benchmark prime lending rates (BPLR) to counter the hike in funding costs and sustain net interest margins (NIMs). The RBI has attributed the high demand for non-food credit to the higher than expected economic (IIP) growth in the manufacturing sector. Having said that, the incremental disbursements to commercial real estate (grew 95% YoY in 1HFY07), home loans (grew 38% YoY) and capital market related activities (grew 39% YoY) were higher than credit to industry (grew 32% YoY) and credit to agriculture (grew 39% YoY).

    Rates over the months...
    (%, per annum) Jan-05 Jan-06 Jan-07
    Bank rate 6.00 6.00 6.00
    Cash Reserve Ratio (CRR)* 5.00 5.00 5.50
    Statutory Liquidity Ratio (SLR) 25.00 25.00 25.00
    Benchmark PLR      
    PSU Banks 10.25-11.25 10.25-11.25 11.50-12.25
    Private sector banks 11.00-14.00 11.00-13.50 11.75-15.50
    Weighted call money rates 4.72 7.40 7.76
    Comm.Papers by companies 5.20-7.25 6.20-7.75 7.74-10.00
    10 year GSec yield 6.67 7.20 7.73
    Deposit rate (> I year) 5.25-6.25 5.50-6.50 7.25-8.50
    Repo rate 6.00 6.50 7.50
    Reverse repo rate 4.75 5.50 6.00
    Source: Economic Survey FY07
    * Subsequently raised to 6% in February 2007.

    The economic survey has based its positive outlook on economic growth momentum and the analogous requirement for higher credit disbursals on the underlying facts that the quality of credit continues to remain healthy and that credit as a proportion of GDP is low in India by international standards. Hence, credit will continue to outpace GDP in terms of growth in the years to come.

    At the same time, the survey has reiterated our belief that the sustenance of the current pace of credit growth is unlikely and is set to slow down going forward. The RBI's ensuing monetary policies are expected to continue facing the challenge of taming inflation while not hurting economic growth prospects. Furthermore, with buoyant capital flows through the balance of payments, monetary and credit policies will have to steer a careful path of maintaining the international competitiveness of domestic economic environment.

     Research ReportsTop 100 Indian companies with Buy/Sell price limits
     StockSelectBuy/Sell recommendation every week in your mailbox
     Mid-Cap SelectBuy/Sell recommendation every fortnight in your mailbox
     FundSelectMutual Fund Advisory with downloadable database

    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...


    © Equitymaster Agora Research Private Limited |
    Why Personalfn? | Why Equitymaster? | Terms of Use | Contact Us | About Us