Line Item

21 Dec 2009

On the first day of Christmas a large, private Indian bank informed its customers that credit limits would be reduced by 15% and the cash withdrawal facility was being, well, withdrawn. This message went not to delinquent but good customers paying over 36% interest a year.

The week before the RBI circulated an inquiry of bank holdings in debt mutual funds. The concern was that money printed by the RBI was not being lent but deposited in mutual funds and delivered to corporate clients in the commercial paper market because bank lending limits had been exhausted.

The banks response to the RBI was not to stop the mutual fund subterfuge but reduce lending to paying customers.

Depriving paying customers of spending power at the end of the quarter is not a choice banks make willingly unless there is much more to the story. The runaway food price inflation, 20% year over year, has handcuffed the RBI sooner than expected. Banks need to reduce risk and make room on the balance sheet for more government paper.

The ten year government bond yield has sauntered north of 7.75% from 7.4% one month ago. Rising rates lead to declining price for bonds held in bank trading portfolios and those lesser values must be marked to market at the end of each quarter.

Dealers are holding $10 billion worth of an unpopular, off period, 9 year and 11 month bond that is flailing in the face of a new ten year issue. There are few buyers for the new paper, and no buyers for the old paper which, even though it matures one month earlier, is 20 basis points less valuable.

The RBI plan to withdraw the 3% of GDP government spending over the course of the next two years has been truncated. In 2010 short term rates will rise by 3% while government borrowing will rip long term rates above 8.4%.

The Planning Commission is to be commended for its useful insight requesting $50 billion, half annual government borrowing, to prepare 500 million workers for jobs in 2030. Presumably a few of those jobs would be for a new economic team.

Make it a line item for the season of giving.