What does the constant reference to de-growing credit (98% even!) mean?  Industry participants point to this in support of their claim that credit has dried up.  Could it exactly the opposite?  At the peak, the risk premium goes down; it being the discount factor (denominator) it increases the price of all securities.  The reverse happens in a panic where this risk increases drastically making a lot of projects that were viable with a lower interest rate no longer viable.  This means that companies will withdraw some projects that don’t make sense in the revised risk regime.  We have been seeing some of this with large SEZs being shelfed even at the risk of paying hefty penalties.  This has the desirable effect of reducing supply in an environment that is already demand constraint and thus start the process of finidng a reasonable price.   

Now this is how the free-market does and and it is clearly not a painless process.  So we prevail on the government to nudge interest rates lower.  Now what if the Bankers find these rates too low to compensate them for the risk they now percieve?  They stop lending, restricting supply thereby putting upward pressure of rates – text book economics! 

Lower rates are always preferred but the market has to be allowed to find the clearing price.  The same is the case with the bond market, Treasury’s high appetite for debt is not only crowding out the corporate borrowers with low credit ratings (Tatas did just fine with their over-subscribed issue) by very really increasing rates.  While this may be counter to the RBI’s p;loicy intent, one must remember it only controls the shirt end of the term structure.