All it took for the BSE Bankex to soar 535 points on Tuesday was some R20,000 crore of liquidity. The markets shrugged off the 25-basis-point hike in the repo rate — the Sensex closed at a new high for 2013, rallying 359 points — which will most certainly keep loan rates at current levels even if it doesn’t prompt banks to push them up. To be sure, it must have been a relief that the Reserve Bank of India (RBI) didn’t take any harsher measures.
But a rally of this magnitude is surprising; investors seem to be in denial of the interest rate trajectory. How could they miss the fact that, at least for now, governor Raghuram Rajan is firmly focussed on fighting inflation even if growth is slowing?
Consumer inflation, the RBI feels, cannot be ignored; in its view, the CPI could remain at “around or even above 9% in the months ahead, absent policy action”.
So, while the additional quantum of borrowings, allowed through the term repo windows, will help bring down the cost of funds for banks marginally, it will be little consolation since money is much more expensive now than it was a year back. And while short-term money could become cheaper, rates at the long end will stay high.
First, because, there are no indications the government will scale back its borrowings and, second, because deposits are hard to come by; at 14-15%, they’re growing really slowly and banks simply cannot afford to upset customers.
If depositors are eluding banks, so are borrowers; the lack of lending opportunities in a tough economic environment, in which assets are turning toxic faster than ever before, is evident from the loan growth numbers. ICICI Bank’s corporate book grew just 11% y-o-y in Q2FY14 and commentary suggests banks are being very careful about who they lend to. A study by Kotak Institutional Equities shows lenders sanctioned only R22,000 crore across 82 projects in Q1FY14, less than 0.5% of loans — one of the lowest levels seen over the past few years.
A combination of high interest rates and caution on