Indian economy report: Q3 2007-08

RBI’s quarterly report on Indian economy and financial markets has been released. It is released a day before the Monetary Policy meeting. The summary of the report is here.

I have not read the report. I will post later if I find anything interesting.


The report is routine stuff with lots of numbers and statistics. However, chapter 3 of the report on Monetary and Liquidity Conditions is really interesting. The new doing the rounds in economy is that rates are too high, banks are not giving loans etc. Here is what RBI has to say:

  • Non-food credit by scheduled commercial banks (SCBs) expanded by 22.2 per cent, y-o-y, as on January 4, 2008 as compared with 28.4 per cent at end-March 2007 and 31.9 per cent a year ago. The deceleration in credit growth coupled with the acceleration in deposit growth led to a decline in the incremental credit-deposit ratio (y-o-y) of SCBs to 63.3 per cent as on January 4, 2008 from 93.7 per cent a year ago.
  • Disaggregated sectoral data available up to November 23, 2007 show that about 43 per cent of incremental non-food credit (y-o-y) was absorbed by industry, as compared with 34 per cent in the corresponding period of the previous year. The expansion of incremental non-food credit to industry during this period was led by infrastructure (power, port and telecommunication), iron and steel, textiles, engineering, food processing, vehicles, petroleum, chemicals and construction industries. The infrastructure sector alone accounted for over 28 per cent of the incremental credit to industry as compared with 18 per cent in the corresponding period of the previous year.
  • Apart from bank credit, the corporate sector continued to meet its funding requirements from non-bank sources such as capital markets, external commercial borrowings and internal generation of funds. Resources raised through domestic equity issuances during the first nine months of 2007-08 (Rs.31,897 crore) were higher by 40 per cent than the corresponding period of the previous year.

So, capital raising is not that much of a problem. However, credit has slowed down but deposits have increased within banking system. Where are these deposits then invested in?

  • Growth in deposits, issuances of fresh capital and internal generation of funds by banks on the one hand, and moderation in credit growth on the other, enabled banks to deploy their funds in Government and other approved securities, which increased by 24.7 per cent, y-o-y, as on January 4, 2008 as compared with 5.9 per cent a year ago. 
  • Investments by SCBs in non-SLR securities (such as shares/bonds/commercial papers) increased substantially during the year. As regards banks’ exposure to the external sector, while banks’ overseas borrowings expanded, their holdings of foreign currency assets declined

So, it is not as much a problem with lower credit on account of lower deposits. The deposits have been growing but instead of deploying the proceeds as credit, they are being invested in G-Sec and other financial assets. Why is that? The reasons that comes to my mind are:

  • There are no really bankable projects- this is scary to think of given the huge infrastructure deficit in the country.
  • The returns on financial assets are higher- the banks could prefer financial assets instead of giving loans for creating real assets. The returns on real assets could be lower or the projects may not really be worthwhile.
  • The interest rates are quite high and the corporates are not looking forward to banks to raise debt capital. But cost of debt is lower than cost of equity and corporates seem to be raising via the equity route. Hence, this high interest rate is not really an important factor.

What else could be the possible reasons?

3 Responses to “Indian economy report: Q3 2007-08”

  1. India Monetary Policy Review: Q3 2007-08 « Mostly Economics Says:

    […] the Q3 2007-08 macroeconomic report, it is seen that despite rising deposits, banks have not been deploying it in credit but in G-secs […]

  2. Real Assets Says:

    Real Assets

    Thanks for this post!

  3. Rocky Says:

    Thats Informative Thanks

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