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India Macro Watch
BSR: On why rising rates will
bleed, not kill
Bottom line: Structurally lower rates limit growth damage
„ Incoming RBI data support our view that rising rates will slow growth but not
kill. After all, rates are coming off structurally when growth is higher. The
closest India came to a rates-driven recession was in mid-90s. Things are
different now. Today’s Basic Statistical Returns of Scheduled Commercial
Banks (BSR) shows that industrial loans at sub-10% lending rates have gone
up to 32.5% of total on March 2010 from 0.7% in mid-90s. (Charts 1-3) That
said, we continue to highlight that real lending rates, at 8.25% (=14.25% SBI
prime lending rate – 6% medium-term inflation rate), have pierced the ‘neutral’
level defined by our 8% potential growth. Besides, we expect another 50bp
hike in by December. This should pull growth down to 7.5% levels in FY12.
Still, growth is unlikely to fall below 7% levels unless there is also a drought
(rains are still 96% of normal) and a global shock (not expected by our global
economics team). Do read our recent stress-testing slowdown report here.
Why it matters: 25bp September 16 RBI rate hike
„ Against this backdrop of still relatively limited sub-7% growth risks, we expect
the RBI to persist with its anti-inflationary monetary policy. It will, at the least,
hike policy rates by 25bp on September 16. Even if inflation peaks in
September, as we expect, we would assign a small probability to the tightening
cycle dragging on to October 26. With growth slowing, we expect the RBI to
cut policy rates by 75bp by mid-2012.
Key points: Structurally lower rates = medium-term growth
„ Looking beyond immediate rising rate worries, we continue to expect the
medium-term structural reduction in interest rates to sustain high 7.5-8%
growth till 2020. For details, do read our silent revolutions report here.
„ Why? Due to financial sector reforms. Lower cash reserve ratio (6% from 15%
in mid-1990s) and statutory liquidity ratio (24% from 40% levels) have made it
easier for banks to meet credit requirements.
„ The RBI’s just-released BSR, a compendium of micro-level banking data,
shows that industrial loans extended at lending rates of 10% and less have
gone up to 32.5% of total in March 2010 and 23.3% in March 2009 from 0.7%
in mid-1990s (Table 1). While the Lehman shock does exaggerate the
reduction in lending rates in March 2010, the basic trend is still telling.
„ Industrial loans extended at lending rates of 14+% have come down to 5.7% of
total on March 2010 and 11.2% on March 2009 from 87% in mid-1990s.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Macro Watch
BSR: On why rising rates will
bleed, not kill
Bottom line: Structurally lower rates limit growth damage
„ Incoming RBI data support our view that rising rates will slow growth but not
kill. After all, rates are coming off structurally when growth is higher. The
closest India came to a rates-driven recession was in mid-90s. Things are
different now. Today’s Basic Statistical Returns of Scheduled Commercial
Banks (BSR) shows that industrial loans at sub-10% lending rates have gone
up to 32.5% of total on March 2010 from 0.7% in mid-90s. (Charts 1-3) That
said, we continue to highlight that real lending rates, at 8.25% (=14.25% SBI
prime lending rate – 6% medium-term inflation rate), have pierced the ‘neutral’
level defined by our 8% potential growth. Besides, we expect another 50bp
hike in by December. This should pull growth down to 7.5% levels in FY12.
Still, growth is unlikely to fall below 7% levels unless there is also a drought
(rains are still 96% of normal) and a global shock (not expected by our global
economics team). Do read our recent stress-testing slowdown report here.
Why it matters: 25bp September 16 RBI rate hike
„ Against this backdrop of still relatively limited sub-7% growth risks, we expect
the RBI to persist with its anti-inflationary monetary policy. It will, at the least,
hike policy rates by 25bp on September 16. Even if inflation peaks in
September, as we expect, we would assign a small probability to the tightening
cycle dragging on to October 26. With growth slowing, we expect the RBI to
cut policy rates by 75bp by mid-2012.
Key points: Structurally lower rates = medium-term growth
„ Looking beyond immediate rising rate worries, we continue to expect the
medium-term structural reduction in interest rates to sustain high 7.5-8%
growth till 2020. For details, do read our silent revolutions report here.
„ Why? Due to financial sector reforms. Lower cash reserve ratio (6% from 15%
in mid-1990s) and statutory liquidity ratio (24% from 40% levels) have made it
easier for banks to meet credit requirements.
„ The RBI’s just-released BSR, a compendium of micro-level banking data,
shows that industrial loans extended at lending rates of 10% and less have
gone up to 32.5% of total in March 2010 and 23.3% in March 2009 from 0.7%
in mid-1990s (Table 1). While the Lehman shock does exaggerate the
reduction in lending rates in March 2010, the basic trend is still telling.
„ Industrial loans extended at lending rates of 14+% have come down to 5.7% of
total on March 2010 and 11.2% on March 2009 from 87% in mid-1990s.
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