Slow loan growth likely to continue: Citi

MUMBAI: Despite a slew of measures followed by interest rate cuts by RBI, the deceleration in loan growth is likely to continue in India. Credit growth, a key parameter to the economic recovery, has already slowed down from an average of 25 per cent plus during April-Dec (2008) to 18 per cent levels currently.

Two key factors for slow loan growth can be attributed against such lower loan growth, according to a Citigroup study report. Those are: (1) lower economic activity and (2) fear of rising non-performing loans.

Said Rohini Malkani, economist, Citigroup, ���This could escalate the negative feedback loop ��� tightening financial conditions, weakening activity. It can further lead to tightening in credit standards, which would result in growth remaining weaker for longer.���

Amidst such slow-paced credit growth, Citigroup also expects an additional 100bps easing in rates in the coming months by RBI. RBI has cut the repo rate by 400bps (from 9% to 5%) and the reverse repo rate by 250bps (from 6% to 3.5%) since September 2008.

On the other hand, a rising deficit should lead to higher borrowings. Deficits are likely to once again breach double-digit levels. The key reasons for the trend reversal are higher expenditure (but not the good kind), a slow-down in revenues and stimulus packages. Given the global crisis, all economies are likely to see a substantial rise in deficits and India is no different, the report by Citigroup on emerging markets macro and strategy outlook mentions.

A key point worth keeping in mind is that India���s stimulus package is relatively smaller at 1.5 per cent of GDP. With governments the world over resorting to counter-cyclical fiscal policies to counter the downturn, investors are differentiating on economies that are in a position to use fiscal policy and those that have limited fiscal maneuverability.

���Unfortunately, India falls in the latter camp. While it has historically run high deficits, capital flows have minimized the impact of high deficits on the real economy in the past,��� said Malkani.