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Weekly RBI Tracker: Credit growth outstrips deposit growth

26 Aug 2025 , 06:39 PM

Credit growth outstrips deposit growth. Forex reserves rise again.

India’s banking credit growth is showing sustained improvement. As per the latest data, it has improved to 10.2% YoY. Current credit growth has also outstripped deposit growth for the first time since mid-April. The improving credit growth is also reflected in lower SDF utilization and high credit-to-deposit ratio metrics.

Forex reserves have sustained their increase. In the 1^st week of August, they had fallen sharply (by USD 9.3 bn). However, they have recovered USD 6.3 bn of the fall and have increased for the 2^nd consecutive week.

Improving credit growth trajectory intact:

Latest data from RBI provides further support in favor of rate cuts starting to boost growth. Banking credit growth has increased to 10.2% YoY (from less than 9% at the end of May and 10% at end of July). Credit growth has also crossed the deposit growth for the first time since mid-April.

Till the current improvement in credit growth, RBI had battled with lack of transmission of lower rates by the banks. While RBI had cut policy rates by 100bps YTD, the first 50 bps of rate cut had a limited impact on arresting the decline in credit growth. However, after the latest rate cut of 50bps in June, credit growth has shown a sustained improvement.

The jumbo rate cut by RBI was partially necessitated by the sharp fall in credit growth. From above 10%, it had fallen to below 9% as of end of May. This was the worst credit growth witnessed in three years. The sharp fall happened despite the RBI’s start of the rate cut cycle in 2025. RBI cut repo rate already by 50bps in 2025 (prior to the 50bps rate cut in June). Anaemic demand for credit, coupled with the lack of speedy transmission of rate cuts was the likely culprit.

Slowing credit growth in 2025 likely had roots in the excessively “hot” credit growth witnessed in the past 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 the services sector. The high pace was unsustainable and carried risks of asset quality deterioration and overheating in pockets of the economy.

Figure: Credit Growth improvement is sustaining

Source: RBI

Credit Deposit Ratio spikes:

In sync with the credit growth trends, credit deposit ratio remained elevated. As highlighted, credit growth was faster than deposit growth in the latest data release. After moderating to ~77.4% in June, it has spiked to 79.25% in July/August. This is among the highest credit deposit ratios seen in the past 3 years.

Figure: Credit Deposit Ratio Spikes

Source: RBI

Forex Reserves rise for the 2^nd consecutive week:

India’s forex reserves have increased for the 2^nd consecutive week. After the sharp USD 9 bn fall in reserves during the first week of August, they have increased by USD 6.2 bn over the past two weeks to cross USD 695 bn. Nearly all of the increase was driven by an increase in Foreign Currency Assets (+ USD 1.9 bn). On the other hand Gold reserves fell USD 0.5 bn. The recent peak for India’s forex reserves was USD 702.8 bn in June 2025. Current forex reserves are still USD 7.7 bn below the June peak.

Figure: Forex reserves witness a sharp fall

Source: RBI

SDF utilisation continues to drop:

The latest data indicate that SDF utilisation has stabilised in the recent weeks. As credit growth improves, banks have likely deployed excess liquidity instead of parking funds in the SDF facility.

SDF has emerged as a key avenue to park excess liquidity by Indian banks. Earlier, SDF utilization had increased to a 3 year peak before falling sharply in July.

From a peak of more than INR 2.5 trn, SDF utilization has moderated to less than INR 1.5 trn now. The moderation in SDF utilization also coincides with the pickup in credit growth.

Figure: SDF utilisation has moderated and stabilised

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.

RBI holds policy rates stable:

In its August MPC, RBI held policy rates steady. Policy stance also continued to be ‘neutral’. Also, banking credit data indicates that much of the monetary transmission has already happened with incremental lending and deposit rates having fallen by 80-100bps YTD.

A quick recap of repo rate cuts in 2025: In 2025, the RBI has already cut the repo rate by 100bps. 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. In addition to the sharp rate cut, there was also a notable change in stance in the RBI’s monetary policy. It changed from ‘Accommodative’ to ‘Neutral’. In essence, it implied that further rate cuts were unlikely unless the growth surprises negatively.

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