Money & Banking

Industrial growth may dip OUR BANKING BUREAU Mumbai, Feb 23  Industrial growth, which is now close to 8%, is likely to be affected due to a fall in demand following declining farm growth and rising interest rates, credit rating agency Icra said in its update on ‘trends in the banking sector.’ Icra cautioned that any possible slowdown in industrial growth may also affect the quality of loans for the banking sector as such. “Even though the sustained strength in industrial activity and services sector indicates continued support to GDP growth in 2004-05, the positive agricultural sector growth since the last fiscal year may not be sustained further due to the impact of lower than average monsoon this year,” said the credit rating agency. The increase in short-term interest rate in the Credit Policy in October by the Reserve Bank of India (RBI) is a signal to the market that the fundamentals of inflation and interest rate dynamics may not allow a softening of bond yields. “For example, the yield to maturity on 10-year government securities has moved up close to 80 basis points since October 2004. This increase in bond yields is likely to impact the profitability of banks in so far as a lower than expected trading and treasury income,” Icra said. The rating agency also emphasised that as interest rates have moved up in recent times (led by a hike in housing loan rates and deposit rates), the spread between a short-term paper and long-term paper has now increased to around 150 basis points, from a low of 50 basis points not so long ago. “With the growth cycle in the rest of the world gathering momentum, there is little reason to believe that India would like to pursue an easy monetary policy,” said the report. The expected upward movement in interest rates is likely to reduce trading profits for scheduled commercial banks (SCBs) as well as cause an upward pressure on both deposits and lending rates, it said. “Overall, SCBs profits are expected to remain stable in the short-term. However, continued reduction in trading profits could exert a downward pressure on profits in the short to medium term,” said Icra in its report.

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