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Three Reads: High Credit/Deposit Ratio, Bearish US Housing, Trouble in Walmart-Bharti


Manas at Livemint points out to the real reason behind the RBI move yesterday (HT Reader Rakesh/Vandana Ojha):

Between 12 July (just before the central bank took the liquidity tightening measures to prop up the rupee) and 20 September, while the bank credit had gone up by Rs.2.18 trillion, bank deposits had increased by a much lower Rs.96,490 crore. In other words, the incremental credit to deposit ratio over the period was a huge 226.7%.

This was because of two reasons. One, companies preferred to borrow from banks because of the high rates prevailing in the money markets, and two, there was a pick-up in bank credit as the busy season gets underway.

As the chart shows, banks’ overall credit to deposit ratio has crept up steadily, from 76.2% on 12 July to 78.3% on 20 September.

Banks had to lend because corporates which chose to issue CP or bonds were now paying 11%+ in the money markets for short term borrowing. As those rates smooth out, corporates will go back to that market (where mutual funds participate more than banks, so it’s not technically adding to bank credit). This is a good point, but if one really wants to fight inflation, rates shouldn’t be eased. Liquidity should be provided at a higher rate, at least until inflation was eased.


Oh, there is a negative viewer of US Housing! Mark Hanson, a veteran mortgage banker, predicts that things in the US housing sector, known as the next big big thing, is exactly not that. Much of the recent upmove, he says, has been by speculative cash buyers buying up houses and increasing prices beyond regular affordability. The private equity and hedge funds added to the bubble. Now, things seem to be souring as Month-on-month new home sales (indication of real buyer activity, since speculators prefer ready houses) came in at -27.4% in July. 

In summary, the past two-years of massive Fed, Gov’t, and bank intrusion into the housing market went way too far.  Houses are mis-allocated, there is no shortage of houses “in which to live”, and in ALL the popular “mega-recovery” regions are at least 50% expensive on a monthly payment basis than they were at the peak of the housing bubble in 2006. And all it will take is the wave of “cash-money” buyers ‘easing off” a bit; “some” of the organic first-time and repeat buyer cohort stepping away due to the sudden lack of “affordability”; and/or a wave of supply from “panic sellers” hitting the market to send sales volume and prices down sharply, over a very short period of time. And I think the rate “surge” catalyst has caused all three to occur at the same time.


Walmart isn’t quite happy about their joint venture in India, reports Reuters. The problem? The whole venture was based on the government allowing FDI into organised retail, which has not happened, and in fact, has been specifically disallowed unless onerous conditions are met. One of them is that they should source 30% of their goods from Indian companies.

"We created a franchise in retail with Bharti in the hopes that there could be a potential freeing up (of foreign direct investment) that would allow it to potentially be the base of the business. But frankly, the FDI has passed," said Wal-Mart Asia Chief Executive Scott Price on the sidelines of the APEC conference in Bali, Indonesia

"That means the existing franchise to Bharti is not tenable as the base. What we are talking about with Bharti is what we do with that business."


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