Banks are under pressure to raise their deposit as well as their lending rates. A look at the numbers shows that the incremental credit-deposit ratio, or the increase in credit as a percentage of the rise in deposits, has been going up since June. Simply put, banks are increasingly unable to find the deposits to fund their credit growth.

The table shows that the dramatic decline in bond yields from around mid-July was the result of the comfortable liquidity situation that banks found themselves in between mid-July and September. Since September, however, the resource crunch has become much more severe.

No wonder call money rates, the rates at which money is borrowed and lent between banks overnight, are very high. Of course, long-term yields are nowhere near the levels seen in July, but then it can be argued that the spike in rates at that time was abnormal, the result of the meltdown in the stock market in May and the worry that the flow of funds to India would dry up.

Another consequence of the crunch has been that banks have been forced to tap other sources to augment their resources. That’s seen in the market for CDs (certificates of deposit). While outstanding CDs went up by Rs 10,942 crore in the six months between October 14, 2005 and April 14, 2006, the outstandings increased by Rs 26,706 crore in the five-and-a-half months between April 14, 2006 and September 29, 2006.

Is the sharp rise in the incremental credit-deposit ratio in the last couple of months (since the onset of what traditionally used to be known as the busy season for banks) an indication that the RBI’s policy of raising the repo rate (the rate at which it lends to banks) by 0.25 percentage points in its mid-term credit policy review will soon start biting'

There is one strong mitigating factor. Traditionally, the last quarter has been the period in which funds flow to stock markets rise. As long as the foreign funds keep pouring in and as long as the RBI keeps mopping up dollars and releasing rupees into the market in an effort to keep the rupee from appreciating, bank liquidity will get boosted.

Tech stocks

The BSE IT index has comfortably outperformed the sensex in the last one month (between October 10 and November 10, 2006), notching up gains of 8.7 per cent compared with a gain of 6.9 per cent for the sensex).

But the IT index has been a terrible underperformer for the year as a whole. In 2006, while the sensex is up 40.7 per cent, the BSE IT index is up only 29.8 per cent. Of course, the range of returns for IT scrips is very wide, with only Infosys showing high returns for the full year. However, the other scrips have done well in the past month, and a catch-up process seems to be unfolding.

Won’t the slowdown in the US hurt IT stocks' Perhaps not. One argument is that US companies will do even more outsourcing if there’s a slowdown. That reasoning didn’t work after 2000 because nobody wanted to expand their investment in technology. This time there’s another powerful argument. The slowdown in the US is because consumer demand is slowing, while business and capital investment is not expected to slow. We can see this dichotomy being reflected in the US market by looking at the differing behaviour of semiconductors, which are heavily cyclical and dependent upon consumer electronic demand, versus software, which is more influenced by business demand. While semiconductor stocks have lagged, software stocks have been rising.

The rotation into IT in the Indian market, therefore, seems to be on a firm footing.