A slew of data, both micro and macro, has been pointing to a strong recovery in the economy. Tuesday’s robust numbers for industrial production in November beat all expectations. The December data from the HSBC Purchasing Managers’ indices, both for manufacturing and services, show solid growth. Automobile sales numbers, cement despatches and port traffic have all shown strong momentum. All that was needed to complete the picture was a pickup in credit growth. To be sure, bank credit is a lagging indicator, but nevertheless signs of credit growth would be a final confirmation of the vigour of the recovery. That is why Wednesday’s figures from the Reserve Bank of India (RBI) are heartening, as they show very good growth during the last two weeks of 2009.
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But quarter-end numbers have been deceptive before and we have to be cautious, as banks window-dress their figures. A look at the amounts parked by banks in reverse repos shows that this was very low at the end of December. But that low liquidity at the time could also be the result of the advance tax payments that went out of the system and which returned in the beginning of January. Nevertheless, the huge increase in non-food credit growth during the last two weeks of 2009 seems to indicate that at least a part of it would be genuine demand.
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The other, perhaps definitive, indicator that demand growth is back will come from the December quarter corporate results. Unlike in the September quarter, when growth in profits came from cutting costs, analysts expect companies to show double-digit growth in revenue during the quarter. Year-on-year growth may be illusory, given the special conditions that existed during the December 2008 quarter. But if the current results season shows good sales growth compared with the previous quarter, the central bank may have no option but to start withdrawing liquidity. That is all the more so because despite the pickup in credit growth, liquidity continues to be ample, as seen from the Rs65,850 crore parked in reverse repos with RBI on Wednesday.
Graphics by Yogesh Kumar/Mint
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