India Macro Watch: Credit: Still on 20% track - BofA ML

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India Macro Watch
Credit: Still on 20% track


Bottom line: 25bp RBI hike, tighter real estate loan norms
􀂄 We grow more confident of our FY11 20% credit growth forecast. Today’s
RBI data reports that loan demand is broad-basing, but at a slower pace. We
never shared the euphoria about credit offtake jumping 25% a few months
ago. At the same time, we do not subscribe to the current pessimism about
loan growth falling short of 20%, although industrial demand has slackened at
the margin. Against this backdrop, we continue to expect the RBI to pause
after a final 25bp LAF reverse repo rate hike to fight inflation in tomorrow’s
policy. It will also likely tighten prudential norms on bank loans to real estate
companies, given rising home prices. Provisioning on standard assets on this
account is currently 100bp vis a vis 40bp for most others. This reinforces our
expectation of a 50bp hike in lending rates by March atop August’s 50bp.



Why it matters: 50bp hike in lending rates
􀂄 We continue to expect 20% loan growth to push up lending rates by 50bp in
the busy season. In fact, SBI has already hiked lending rates 25bp. Sure,
deposit growth will likely recover to 17.5% by March from the current 15%. At
the same time, this will still result in excess loan demand (of 8.6% of
deposits). Do read our latest deposit report here.

􀂄 Can lending rates spike? We expect the RBI to step up liquidity to avoid this,
as inflation comes off. After all, its 100bp CRR hike has pulled down M3 (and
deposit) growth to 15% from 20% levels, which is simply too tight when
industrial loan demand is still not very firm. As it is, real lending rates, at
7.25% (after factoring in our expected 50bp hike) are already approaching the
'neutral' 7.5-8% potential growth rate level. Do read our last RBI report here.

Details: Loan demand broad-basing, but at slower pace

􀂄 RBI data on sectoral credit flow show that loan demand is broad-basing to
industry from retail and services (Table 2). At the same time, the pace has
slackened. Industrial credit has actually slipped to 22.4% in September from
24.7% in May (adjusted for oil credit, 3G loans and non-SLR investments).

􀂄 Home loan demand continues to inch up to 11.3% from 9.6% in May and
7.3% in November 09.

􀂄 Services loans continued to accelerate to 17.3% from 14.1% in May and
7.9% in November 09.

Next up in India: 25bp LAF reverse repo rate hike
􀂄 India: Monetary policy (November), Tuesday, 2 November 2010.
Next up in Asia: BI on hold
􀂄 Indonesia: BI rates decision, Thursday, 4 November 2010.