Monday, 27 December 2010

Mish Shedlock notices India's credit-fueled bubble

Mish Shedlock has noticed that like China, India too is in the late stages of a credit-fueled boom. From is blog post Food, Fuel Inflation Hits India; Primary Price Index Up 15%, Credit Expansion Up 23%:

"The sustained growth assumptions of India and China at about 10% each are simply not going to happen. Both countries are overheating and there is a not so little constraint called peak oil that will get in the way. Should India maintain its rate of growth, do not expect to see any containment in price inflation. The same holds true for China."

Interestingly, Credit Expansion this year is up 23% whereas deposits are up only 15%. (The RBI had projected 20% & 18% respectively) . The banking system is using repo lines from the RBI to fill the 8% gap.

The RBI, on its part has raised rates to try and stem inflation. At the same time it is cutting the SLR to ease the strain on banks. Buying up the released government bonds is also issuing more liquidity into the system. Its a classic credit-bubble conundrum as I previously described here - how do you keep the musical chairs playing while keeping inflation in check? An impossible task!

As a nation India is borrowing and spending - on food, goods and services - and on leveraged property. Anecdotal evidence is that property flipping using bank loans is back in vogue in NCR (any views on Mumbai?).

See a detailed article on the RBIs moves here.

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