Weekly RBI Tracker: Credit Growth Plunges Further

16 Jun 2025 , 12:05 PM

Credit Growth slows further. RBI rate cuts are yet to take effect:

For the first time in 3 years, credit growth has slipped to below 9%. This is despite RBI’s proactive rate cuts in FY25 (total of 100bps and 50bps in the latest rate cut). As RBI’s jumbo rate cut is passed on to borrowers, it remains to be seen if it is sufficient to reverse the trajectory.

The week also saw India’s forex reserves bouncing sharply and inching closer to USD 700 bn. An increase in both gold reserves as well as foreign currency assets drove the increase.

 

Credit Growth Dips to less than 9% – A first in 3 years:

As per the latest release of credit growth data from RBI, India’s banking credit has dipped another notch in the fortnight ending 30^th May. By mid-May, credit growth had dipped to below 10%. As of end-May, it has further deteriorated to less than 9%. This is the lowest it has been in more than 3 years.

Despite the modest repo rate cuts by RBI (prior to the latest jumbo rate cut) in 2025, credit growth has remained anaemic. One of the factors has likely bee the lack of speedy transmission of rate cuts into lower lending rates for borrowers. In that regard, the latest aggressive repo rate cut and lowering of CRR should accelerate the transmission. As lower interest rates are passed on, the tailwinds for credit growth should strengthen.

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 had dipped to a 3-year low. Much slower than deposit growth

Source: RBI

 

Banks continue to park their money in SDF:

As per RBI’s latest release, SDF balances have increased to their highest level in three years. A rapid acceleration in the RBI’s daily SDF started in April 2025. 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 have increased again and have crossed INR 2trn.

Figure: SDF utilization has spiked, absorbing liquidity

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 – No longer a worry:

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.

As per latest RBI data, CDR has moderated from its recent peak to ~77%. 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.

Figure: Credit Deposit Ratio Drops

Forex Reserves inch closer to USD 700 bn:

As per the latest RBI data, India’s forex reserves increased by USD 5.2 bn week over week to USD 696.7 bn. The increase is fueled by increase in both gold reserves as well as foreign currency assets. The total value of gold reserves increased by USD 1.5 bn to USD 85.9 bn. The total value of foreign currency assets increased by USD 3.5 bn to USD 587.7 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 increased sharply

Source: RBI

 

RBI’s Repo Rate Cut: A boost to credit growth demand

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 latest 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.

Given the continued deterioration in credit growth, it remains to be seen if RBI would consider giving further impetus or adopt a wait and watch approach for the lower repo rates to reflect in lower lending rates before considering another cut.

Figure: Repo Rate cut was higher than expected

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.