The recently released RBI data reveals that system credit growth for the fortnight ended February 26, 2010 has inched to 15.8%yoy. Pick-up in corporate capex plans and increase in investment activities across industries have contributed to higher loan growth. With banks having lent ~Rs3.2tn YTD, over 38% of the same came in last 2-months. We expect loan growth to accelerate further driven by improving credit demand and proactive lending by banks to meet their priority sector lending targets for the year. We estimate system loan growth at 16-17%yoy for FY10 and higher 17-18%yoy for FY11.
The system deposit growth has remained in 16-19%yoy growth trajectory over the past several fortnights. With banks having re-priced a large amount of their deposit books, they have now started mobilizing deposits via various routes. A host of banks like ICICI Bank and HDFC Bank have already raised deposit rates across various maturities in anticipation of higher credit growth in coming periods.
While loan-to-deposit (LDR) ratio has remained at 71% levels for past several fortnights, significant pick-up in loan growth coupled with moderation in deposit growth have improved incremental LDR, which has stretched to 67% levels.
While the increase in reserve requirement was higher than anticipated at 75bps to 5.75%, this increase was implemented in a phased manner, thereby draining over Rs360bn of liquidity from the system. With pick-up in credit growth, banks are expected to divert surplus funds currently parked under reverse repo window towards high-yield earning assets. Rising bond-yields, improving credit environment, soaring inflation and front-loading of government borrowing programme are the factors, which are likely to compel RBI to increase its key rates in order to anchor inflationary expectations while ensuring adequate growth.