Busy season is not so busy say bankers even if seems there?s hectic activity with non-food credit having grown at close to 23% in the fortnight to December 3, 2010. That may be true because the uptick in non-food credit, since the start of the year, is closer to 11%. That?s on the back of a low base, during the same period in 2009, of sub 6%. And if one excludes the Rs 80,000 crore lent by banks to telcos to buy spectrum, the growth would be an even more subdued 9% or thereabouts, because banks would have lent just around Rs 2,40,000 crore between the end of March and early December. However, the data signals some amount of momentum and, should that hold, it?s possible that by March next year, we should get to a level of at least 17-18%. The bad news is that the cost of money is going up and even top-grade companies are paying much more these days to borrow; a Bloomberg report says yields rose 63 basis points this quarter so that they?re now forking out about 141 basis points above government yields for three-year money, the highest level since October 2009. Bloomberg says Housing Development Finance Corporation, India?s largest mortgage lender, sold three-year debt last week at 9.25%, the most in two years. This is partly because money is currently in short supply what with people holding more cash, the government choosing not to spend and money not exactly pouring into banks? deposits. Which is why the central bank has decided it will relieve banks of government bonds, to the tune of Rs 48,000 crore, so that they can put the money to some other use.
But if banks are going to satiate the credit needs of borrowers, who set up more factories or buy houses, they?re going to need to pay more to savers because the real rate of return, which was just beginning to turn positive, could soon turn negative again. That?s because rising crude oil prices will take up with them, prices of just about every other product, albeit at a lower pace. Indeed, with the RBI having stated that there?s an upside risk to it inflation projection of 5.5% for March 2011, with prices of global commodities rising, it?s almost certain that interest rates are headed further north faster than we thought. And therefore, it doesn?t look like the central bank will have a choice but to increase policy rates when it meets in January. By the look of things, RBI will have to keep doing so throughout 2011 so that by the end of year, policy rates may have moved up by as much as 75 or even 100 basis points. That may make large borrowers, who have been reluctant to add capacity, think again about whether they want to go ahead with their expansion plans. Not good news for growth and the stock market returns. What can keep stock prices afloat though is foreign capital flows which will continue to search for better returns. All in all though 2011 could turn out to be a dull year for equities.
