Credit Growth Slips Further; Forex Reserves Increase Sharply

19 May 2025 , 01:08 PM

Credit Growth Continues To Dip Sharply – Slowing economy?

Credit growth is in focus as it continues to dip. The latest fortnightly credit growth data shows that it has decreased further and is no longer faster than deposit growth. As per the latest data, banking credit growth has fallen below 10% and marginally below the deposit growth. Now, credit growth is at its lowest in three years.

One of the reasons has been a moderation after the excessively “hot” conditions seen over the last year. During 2024, banking credit had jumped 20% on a year-on-year basis, supported by strong demand from corporates, retail borrowers as well as from services sector. The high pace was unsustainable and carried risks of asset quality deterioration and overheating in pockets of the economy.

A slowdown in both retail and corporate credit is likely resulting in the slowdown. A variety of factors including tighter norms for NBFC credit and unsecured retail credit (credit cards, personal loans etc) are being attributed to. While a moderation was expected, the sharp fall is increasingly a cause for worry. Also, despite RBI’s pro-active cut in the repo rates, it does not seem to have been transmitted to the economy. Lending rates by banks have not kept pace with the repo rates.

Figure: Credit Growth had dipped to a 3 year low. Slower than deposit growth now

Source: RBI

 

RBI’s Repo Rate Cut: A Pro-Active Move That Is Yet To Stimulate Growth

After having maintained the benchmark policy interest rate (repo rate) at 6.5% for more than a year, Reserve Bank of India (RBI) had cut the benchmark rates in 2025. The RBI has cut the rate twice so far in 2025. After the latest cut in April, the repo rate is 6%. The move signals a shift in RBI’s monetary policy from ‘Neutral’ to ‘Accommodative’. In light of slowing credit growth and macroeconomic uncertainties, RBI has been proactive with its policy tools to offer support. Given the sharp fall in credit growth, further repo rate cuts cannot be ruled out.

Figure: Repo Rate is coming off and policy stance is turning accommodative

Source: RBI

 

What is Repo Rate – A Primer

The repo rate is the rate at which the RBI lends to commercial banks. A lower rate of interest reduces the cost of borrowing for banks, and can ultimately mean lower interest rates for loans to consumers and businesses. It is the primary device employed by the RBI to manage the economic activity in the country.

Goals behind a cut in the Repo Rate

Encouraging Credit Demand: By making borrowing cheaper, it encourages households, firms to borrow and spend on consumption and investment goods. That can be particularly good for rate sensitive areas like housing, auto and small business.

Boosting The Economy: Economists say Reserve Bank of India’s cut will help lift economic activity by bringing down the cost of spending and investment.

Inflation Management: The RBI’s move to reduce the repo rate comes against the backdrop of inflation moderating particularly in food prices. Retail inflation dropped, giving the central bank a room to have a more accommodative stance without actually contravening its inflation targets.

Boost Liquidity: The rate reduction is combined with steps to provide liquidity to the banking system so banks have the required cash to lend more money.

 

SDF Balances Are Still High

As per RBI’s latest release, SDF balances are increasing again. A rapid acceleration in the RBI’s daily SDF started in April 2025. 20D average SDF utilization has increased to nearly INR 2 trn – a high not seen since 2022. This rise resulted in overall liquidity conditions tightening after the improving conditions witnessed during the early part of 2025. Subsequently, they had moderated to less than INR 1trn in the 3^rd week of April. However, an analysis of recent data, shows that they are on the rise again. By the end of last week, SDF balances again crossed INR 2 trn.

Figure: SDF utilization continues to be high

 

Source: RBI

What is SDF – A Primer

The SDF is a non-collateralised instrument which the banks can use for parking their surplus funds at the RBI and earn interest at a slightly lower rate than the repo. It was implemented in April 2022 as a cleaner and more efficient alternative to the conventional reverse repo.

Unlike reverse repo, the SDF does not mandate the RBI to transfer government securities as collateral, making it a more efficient tool to absorb liquidity. This has now become the de-facto floor of the RBI’s LAF corridor.

 

Credit Deposit Ratio – Eases Significantly

With slowing credit growth, the narrative on banks facing a challenging liquidity situation has flipped. In the recent past, Indian banking system had witnessed high credit growth and rising credit deposit ratio. This had also resulted in tighter liquidity conditions, higher competition for funding and higher funding costs.

As per latest RBI data, CDR has moderated from its recent peak to below 78%. A moderating CDR indicates either the relative pace of credit slowed or deposits picked up or a combination of both happened. A closer look at the net liquidity in the system indicates that the banks parked excess funds in low interest earnings SDF facilities as the demand for credit moderated. Despite the obvious ramification that credit growth might be slowing, a balanced and/or moderate CDR provides operational room to the banks in the event of a pickup in credit growth.

Figure: Banking Credit Deposit Ratio Drops – Moderating Credit Growth

Source: RBI

 

Forex Reserves Fall Rise Again

As per the latest RBI data, India’s forex reserves fell by USD 4.6 bn week over week to USD 691 bn. The rise was almost entirely due to increase in Gold reserves. After falling last week, Gold reserves were up sharply. They surpassed the earlier peak and increased to USD86.3 bn.

Gold Reserves serve an essential role in diversifying the country’s forex reserves. The main component of forex reserves is the foreign currency assets. They contribute to more than 80% of forex reserves.

India’s forex reserves are healthy and close to the peak reserves witnessed in 2023. In 2025, Gold Reserves had increased sharply due to the increase in the price of gold. While gold only accounts for 12% of total reserves, it contributed to 25% of these incremental reserves in 2025.

Figure: India’s Forex Reserves Are Nearing The Previous Peak

Source: RBI