Mumbai: Banks are expected to record a 30% growth in credit in 2010-11 on back of strong investment demand, according to HSBC chief economist Robert Prior Wandesforde.

The growth rate forecast by HSBC is almost double the current year’s growth rate of 15%. Historical data shows that banking growth is a lagging indicator of investments, according to Wandesforde.

“Capacity utilisation at 97% (firms operating at or above optimal capacity) is almost back to its earlier peak of 97.7%. Therefore, there is a clear need to expand capacity,” said Wandersforde, adding that this view is backed by industrial output figures which indicate a strong growth in industrial output and a robust export recovery.

Boosting investment demand would be the conducive policy environment with the government announcing that it is keen to get the economy back on the 9% growth trajectory. According to Wandesforde, the economy is expected to clock a growth of 8.5% in FY11. However, for FY10, it has retained its earlier forecast of 7.2%.

Commenting on the recent Budget, Mr Wandesforde said since the structural budget deficit has not been dealt with, RBI needs to more aggressively tighten monetary policy than it would have otherwise. HSBC expects RBI to revise the repo and reverse-repo rate by 200 basis points from now and 2011.

Compared with other Asian economies, India is ahead in the capacity cycles, he pointed. This makes the case for rate hikes even stronger, he indicated. Though inflation is expected to ease by the end of the calendar year after peaking to close to 10%, Mr Wandesforde felt that the central bank may still have to be watchful as there could be demand-side pressures on inflation due to higher wages and consumption expenditure.

HSBC expects the first rate hike in April. In calendar year as a whole, it expects the RBI to hike both the cash reserve requirements for banks as well as the repo and the reverse-repo rate by 125 basis points.