Weekly RBI Tracker: Banking Credit Growth Improvement Fails To Sustain

15 Jul 2025 , 12:54 PM

Credit Growth improves in the first data release since RBI’s jumbo rate cut.

After showing a brief sign of improvement, the latest data release from RBI indicates that banking credit growth moderated again (to less than 9.5%). This is the second data release after RBI’s jumbo 50bps rate cut in early June. It fails to indicate a sustained pickup in credit growth.

The week also saw India’s forex reserves moderating to less than USD 700bn.  The USD 2.5 bn fall in forex reserves was entirely due to a fall in foreign currency assets.

 

Credit Growth Moderates After A Brief Improvement:

As per the latest release of credit growth data from RBI, India’s banking credit growth has fallen to a tad below 9.5%. This is a disappointing development as this is the 2^nd data release after RBI’s jumbo 50bps rate cut; and had shown an improvement after the first rate cut.

Recent credit growth trends show that the credit growth has fallen sharply from above 10% to below 8%. This was worst credit growth witnessed in three years. In a positive development, it had imporved to 9.5%+ after the announcement of RBI’s jumbo rate cut. However, it has moderated again now.

It has to be noted that there was no reversal of credit growth trends when RBI cut repo rate by 50bps in 2025. Anaemic demand for credit, coupled with lack of speedy transmission of rate cuts was the likely culprit. In a surprising move, the RBI had cut the repo rate by more than 50bps in the first week of June. The first data release after the cut had shown a sharp improvement in credit growth trends.

A quick recap of India’s credit growth is that the conditions were excessively “hot” 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 resulted in the current 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.

Figure: Credit Growth moderated after showing initial signs of recovery

 

Continued surge in money parked in SDF:

The latest data shows that there is no letup in banks parking their money in SDF facilities. They have increased to the highest levels seen in the past three years. Even during the week when credit growth had increased, SDF utilization continued to increase – showing the growing preference for this facility amongst banks. From under INR 1 trn for most of the past three years, they have surged sharply since April 2025. In April 2025, 20D average SDF utilization has increased to nearly INR 2 trn – a high not seen since 2022.

Figure: SDF utilization has spiked, absorbing liquidity

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 – Dips Again:

As per the latest data release, credit deposit ratio has moderated again to ~77.5%. While it had picked up in the previous fortnight, credit to deposit ratio has moderated again. Moderating credit growth is the likely reason for the dip.

Not too long ago, credit deposit ratio was a closely watched metric as banks competed to raise deposits to meet the strong credit growth. However, the narrative on liquidity in banking has changed significantly. As credit growth slowed, banks are no longer worried about tight liquidity conditions.

Figure: Credit Deposit Ratio Drops

 

Forex Reserves fell by ~USD 2.5 bn:

A week after crossing USD 700 bn, India’s forex reserves fell by USD 2.5 bn week over week to USD 699.97 bn. The decrease was due to a sharp decrease in foreign currency assets. The total value of foreign currency assets decreased by USD 3.0 bn to USD 591.3 bn. Gold reserves increased modestly to USD 84.8 bn. Gold reserves had increased substantially YTD. In 2025, while gold accounted for only 12% of total reserves, it contributed to 25% of incremental reserves.

Figure: Forex reserves fell modestly

 

RBI’s repo rate history:

After having maintained the benchmark policy interest rate (repo rate) for more than a year, Reserve Bank of India (RBI) had cut the benchmark rates by 100bps in 2025. The last cut of 50bps had come as a positive surprise vs expectation of 25bps. The cut was also significant as it took the repo rate to levels not seen since 2022.

While the rate cuts had been surprising, there was also a notable change in stance in RBI’s monetary policy. It changed from ‘Accommodative’ to ‘Neutral’. In essence, this implied that further rate cuts were unlikely unless the growth surprises negatively.

The latest banking credit growth data also showed that the RBI’s monetary easing may already be impacting credit growth positively. Banking credit improved to 9.5%+ after falling in the prior month to the lowest growth in more than 3 years.

Figure: 100bps Repo Rate in 2025

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.