Morgan Stanley economists Chetan Ahya and Mihir Sheth note that after five quarters of deceleration, the June 2006 quarter showed a sharp rebound to growth. They ask if Indian growth acceleration is sustainable in their weekly global roundup. Below is an excerpt from their analysis:
We believe that while household leveraging remained strong until the quarter ended June 2006, anecdotal evidence suggests that banks have started slowing their lending growth in this area over the last few weeks. Aggregate banking system credit growth also witnessed marginal deceleration during the month of July. We believe the credit cycle is about to reverse considering the lagged effect of the steady rise in real rates over the past few months, increasing supply constraint in banks’ balance sheet (i.e. low deposit growth) and the Reserve Bank of India’s measures to control aggressive credit by increasing risk weights for banks lending to select sectors. As regards government spending, the finance ministry has also clarified that the spike during the quarter ended June 2006 was due to bunching up of the expenditure and they expect it to slow down. We believe the acceleration of growth during the quarter ended June 2006 is unsustainable. Hence, even as the support from corporate capex remains positive, the weaker trend in the other three drivers including external demand, government spending and household spending should result in a slow down in growth again from the quarter ended September 2006.
See Ahya and Sheth's full analysis.