China’s Glut, India’s Drought. Two Faces of Liquidity

Lenders in the world’s two most-populous nations are having very different problems with monetary and fiscal taps. In China, creditors are drowning in cheap central bank cash, but loan demand is muted. In India, banks are in the middle of their fastest expansion in a decade, but they’re parched for liquidity.

While the Chinese authorities’ struggle to stimulate the economy with 3 trillion yuan ($418 billion ) in long-term cash injections has the world’s attention, the Indian deficit — the widest since 2010 — is also beginning to worry investors.

Barely a few months before the next general election, Prime Minister Narendra Modi’s administration has cut back on spending. That’s hurting lenders. The funds that left bank accounts as advance tax payments by companies in December would only return as deposits as New Delhi starts writing checks to contractors working on government projects. But with the fiscal year approaching its March 31 end, there’s no sign of a last-minute acceleration.

The liquidity drought may be deliberate. Unlike Beijing, New Delhi has every reason to be sanguine about growth. A 7%-plus rate of economic expansion gives it breathing room to slay inflation before embarking on a fresh investment spree after the polls. Unless the Modi government surprises analysts by announcing a populist spending program in its Feb. 1 budget, the reasonable assumption is that it’s angling for an upgrade to its sovereign rating, which is perched at the lowest rung of investment grade. Meanwhile, the monetary authority is seeking to buttress its credibility as an inflation fighter.

The all-around tightfistedness isn’t helping banks. Dismal quarterly results from HDFC Bank Ltd., India’s largest lender by market value, have made it the worst-performing stock on the benchmark Nifty Index this month. The 5% drop in the S&P BSE Bankex index since the end of December has also shone a spotlight on a near-$40 billion liquidity deficit in the banking system last week.

Then there’s the upcoming election, the most expensive in the world. A repeat of the 2019 poll, when politicians spent $9 billion in the lead-up, a lot of it in hard cash, will worsen lenders’ funding challenge. Before the 2019 polls, currency in circulation had risen by more than 9% in 20 weeks. It took several months for the money to go back into the banking system.