Weekly RBI Tracker: Credit growth sustains

12 Aug 2025 , 03:35 PM

Improvement in banking credit growth has been sustained. The latest banking credit data shows that credit growth has improved to above 10%. The improving credit growth is also reflected in lower SDF utilisation and high credit-to-deposit ratio metrics.

Separately, the week ending on the 1st of August witnessed one of the highest falls in forex reserves. They fell by USD 9.3 bn.

Credit growth sustains:

Banking credit growth sustained its improving trajectory. In the latest data release by RBI, banking credit improved to more than 10% (from the previous fortnight’s 9.8%). This is the highest level since May and likely indicates RBI’s policy rate cuts taking effect.

YTD, RBI has cut policy rates by 100bps. The first 50 bps of rate cut had a limited impact on arresting the decline in credit growth. However, after the jumbo rate cut in June, credit growth has shown a sustained improvement.

The jumbo rate cut by RBI was partially driven by the sharp fall in credit growth from above 10% to below 9% as of the 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.

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 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

Credit Deposit Ratio spikes:

As per the latest data release, the credit deposit ratio has increased materially. The pickup in recent credit growth is the likely reason. After moderating to ~77.5%, it has spiked to 79% as per the latest data release. This is among the highest credit deposit ratios seen in the past 3 years.

Figure: Credit Deposit Ratio Spikes

Forex Reserves fall sharply:

After briefly remaining stable, India’s forex reserves fell sharply in the week ending on the 1st of August. The USD 9.3 billion week-on-week decline is the highest in recent history. Much of this decline was due to a sharp decline in Foreign Currency Assets. They fell by USD 7.3 bn. In addition, gold reserves also fell by USD 1.7 bn to USD 84 bn. This marks the total fall in India’s forex reserves since the June peak to USD 14 bn.

Figure: Forex reserves witness a sharp fall

SDF utilisation continues to drop:

The latest data indicate that SDF utilisation has witnessed a modest increase in the week ending 3rd of August. SDF has emerged as a key avenue for Indian banks to park excess liquidity by Indian banks. Its utilisation had seen a sharp uptick from April to July. SDF balances (20D rolling average) are increasing to their highest levels in 3 years.

After spiking to more than INR 2.5 trn, they had started to moderate and had fallen to less than INR 1 trn before rebounding the week ending 3rd of August. The moderation in SDF utilisation also coincides with the pickup in credit growth.

Figure: SDF utilisation had moderated

What is SDF – A Primer

The SDF is a non-collateralised instrument which 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:

Citing stable growth and rising inflation, the RBI’s MPC held policy rates steady. Policy stance also continues to be ‘neutral’. In addition, banking credit data reveals 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 the 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.

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 and 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 the 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 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.