THE Reserve Bank of India’s projections on the eve of the second quarter review of the monetary policy that the economy will grow at a rate lower than last fiscal’s and a steep fall in credit so far has all but set the stage for a “no rate hike”.

In the Macroeconomic and Monetary Developments Second Quarter Review, the RBI said its professional forecaster’s survey has revised downwards the economic growth for 2009-10 to 6 per cent from 6.5 per cent.

Besides, banks’ lending operations — from normal lending to credit cards and home loans — have witnessed a steep fall in growth.

Credit offtake from banks rose just 11.2 per cent as on October 9 — it fell further to 10.8 per cent last week — which is lower than 29.4 per cent a year ago and the RBI’s indicative projected trajectory of 20 per cent set out in the First Quarter Review for 2009-10.

This clearly shows that bank credit is not reaching many sectors of the economy.

Where’s the bank money going then?

With credit offtake declining, commercial banks’ investment in government securities expanded by 40.9 per cent as on October 9 compared with 3.2 per cent a year ago, driven by higher market borrowing by the government.

In other words, instead of lending to other sectors, banks are parking their funds in securities floated by the government to meet the fiscal deficit.

As a result, excess investments of banks in government securities increased to Rs 2,91,279 crore as on October 9, 2009 from Rs 1,69,846 crore at end-March 2009 and Rs 26,933 crore a year ago.

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