At the end of January the Reserve Bank of India, the country’s central bank, held a conference call for analysts and investors.

The message: The bank is worried about continued growth in government borrowing and strong demand for loans from the commercial sector. And that the bank will move to reduce excess liquidity in the banking sector before it leads to rising expectations for higher inflation.

Look out Indian banks, higher interest rates ahead.

I’d be surprised if Indian bank stocks didn’t retreat as the Reserve Bank of India moves from rhetoric to action.

Shares of Indian banks such as Jubak Picks 50 member HDFC Bank (HDB) are already down 20% since January 19 as part of the global correction in emerging markets. Any further decline would give long-term investors who are impressed, as I am, by the results out of Indian retail banks a chance to get into (or add to positions in) the sector at a reasonable price.  (For more on building a global portfolio see my post https://jubakpicks.com/2010/02/05/how-to-build-a-global-portfolio-what-countries-do-you-want-to-own/ )

On January 15 HDFC Bank reported that profits for the third quarter of the 2010 fiscal year were up 31.6% from the third quarter of fiscal 2009. Deposits climbed by 7% from the year-earlier quarter. (The bank’s fiscal year ends in March.)

Credit quality also improved with nonperforming loans falling to 1.7% of loans as of the end of December. They stood at 2.1% of loans in June 2009.

The Tier 1 capital ratio hit 13.8% in the quarter. That’s up almost two percentage points from the end of the September.

The improving nonperforming loan position and the strong capital ratio should enable the bank to continue to expand its network of branches and ATMs. In the quarter HDFC Bank opened another 219 branches (for a total of 1,725) and added 325 ATMs (for a total of 3,898).

Full disclosure: I own shares of HDFC Bank in my personal portfolio.