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Business News/ Opinion / Online-views/  Credit policy: a disconnect in the numbers?
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Credit policy: a disconnect in the numbers?

Credit policy: a disconnect in the numbers?

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Here are the numbers: in 2008-09, GDP (gross domestic product) growth has been estimated at 7.1%, M3 growth was at 18.6%, growth in non-food credit (including investments in corporate paper) at 17.2% and deposit growth at 19.8%.

For 2009-10, RBI projects GDP growth at 6%, M3 growth at 17%, growth in non-food credit (including investment in corporate paper) at 20% and deposit growth at 18%.

Notice that growth in deposits is expected to be lower than growth in credit. If so, won’t that lead to a higher incremental credit-deposit ratio for banks, and, therefore, less money left over to invest in government securities, leading to an upward pressure on interest rates?

As on 27 March, the credit-deposit ratio for all scheduled commercial banks was 72.32, which is very high. Compare the credit-deposit ratio of banks during the previous downturns—at the end of March 2001, it was 53.39%, at end-March 2002, 53.81%, and at the end of March 2003, it was 56.87%.

One reason why bank lending rates were so low during the last downturn is because banks had lots of liquidity, with very low credit-deposit ratios. What’s more, the credit-deposit ratio at the end of March 2005 and 2006 was also lower than at the end of March 2007. So, when RBI points out interest rates were lower then in spite of higher policy rates, one reason could be that the bank credit-deposit ratios were lower.

Gaurav Kapur, senior economist with ABN Amro Bank, however, says there is a substantial stock of liquidity already available, which will keep interest rates in check. He also points out that the money multiplier, which has gone up recently due to the cash reserve ratio (CRR) cuts, may remain stable in the future, as CRR is not expected to be cut to the same extent again, leading to lower growth in M3 in 2009-10.

RBI also believes the current downturn will be less severe than the dot-com bust. For instance, non-food credit growth in 2000-01 was 13.1% and in 2001-02, 12.4%. This time, RBI is expecting a growth of 20%. Note also that the GDP growth rate in 2001-02 was 5.8%, not too different from the 6% growth being projected by RBI in 2009-10.

So why should credit growth be so much higher in 2009-10?

Even if we take nominal GDP growth, the projection is of inflation at 4% at the end of 2009-10, which gives a nominal GDP of 10% (6+4). In 2001-02, nominal GDP growth was 9%. That’s a difference of 1 percentage point in nominal GDP growth between 2001-02 and 2009-10.

But why should that translate into a difference in non-food credit growth of 7.6 (20 minus 12.4) percentage points?

Write to us at marktomarket@livemint.com

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Published: 21 Apr 2009, 11:04 PM IST
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