The shine of India is dimming. With high inflation, plunging stocks and a weakening rupee, the Indian growth story appears to have gone a little out of track.

Banks confirm the bad news. The first quarter bank loan numbers surely point towards a slowdown in the economy. Bank loans do continue to grow, but at a very slow pace. Even though speaking in absolute terms, loans, in the first quarter of (Q1) 2008-09, have done better than the previous two comparable quarters, however, the Q1 growth Y-o-Y (year over year) has slowed down for the third year in a row.

This change and slowdown reflects the impact that the RBI’s monetary tightening scheme has had on the country. Since the end of 2004, the Reserve Bank of India (RBI) has been revising the repo rate — the rate at which the central bank provides liquidity support to commercial banks, and reverse repo rate — the rate at which the central bank absorbs surplus liquidity.

The last three years have seen a reduction in Y-o-Y credit growth in the first quarter. This is related to the impact of the monetary tightening resorted to by the central bank by signalling higher benchmark repo rates since October 2005. The last 2.5 years have seen the central bank hiking rates by 250 basis points, in different phases. It was 6% in October 2005 and now is up to 8.5%.

According to the latest data released by RBI on Thursday, the total non-food credit extended by commercial banks amounted to Rs 23,42,973 crore as on June 20 — the last reporting Friday of the quarter. This represents an absolute growth of Rs 38,879 crore for the quarter. And it seems to allay fears of a slowdown in credit offtake.

Sadly, bankers are not seeing a significant pick-up in credit demand soon. A significant portion is believed to be from oil companies to meet their working capital demand, as crude prices are touching new highs.

Also, the high inflation rate has lead to a decrease in the demand of home-loan seekers. In addition to this, real estate prices are still high in most pockets and further northward interest rates have increasingly affected demand for home loans.

However, not all bankers believe its time to worry. Dena Bank chairman and managing director, PL Gairola, rules out any lack of loan demand. He said that at present, there is some demand across all segments. However, he feels that some indications would only be out by end-July, when the central bank comes out with its ‘report card’ of the economy in its latest macro and monetary developments.

Gairola also pointed out that typically, loan growth is low in the first quarter of any fiscal and it tends to pick up from the third quarter. In fact, in the Q1 of FY08, bank loans recorded a dip for the first time in many years. This time round, the Q1 growth is the highest in three such quarters.

Only time will tell if this is a hiccup, or if the Indian engine has actually ran out of steam.