Bank Credit Growth Slowing, Will RBI Reduce Rates?

Banking sector analysts said that the Reserve Bank of India (RBI) — in its February Monetary Policy Committee (MPC) meeting under the aegis of new RBI Governor Sanjay Malhotra, who took charge last month —  could finally reduce the policy rates to boost sagging growth.

A healthy credit growth is key to supporting economic growth. The huge slowdown in credit also reflects weakening investment from the private sector.

Despite repeated calls for an interest rate cut, the central bank decided to keep the repo rate — the rate at which banks borrow from RBI — at 6.5 per cent for the 11th consecutive time. Importantly, the six-member MPC in December decided on retaining the repo rate through a split vote of 4:2.

Former RBI Governor Shaktikanta Das had maintained that India’s growth was on track, focusing solely on inflation control.

Higher borrowing costs, along with stagnating income levels, have dented consumption, especially since the second quarter of the current financial year. 

"The decision to hold on to (interest) rates has dented economic growth,” former Finance Secretary Subhash Garg had earlier told The Secretariat.  “Clearly, RBI’s policy measures have had limited impact on controlling food inflation, which is primarily driven by supply side management,” Garg said.

Despite the unchanged repo rate, inflation based on the consumer price index (CPI) touched a high of 6.21 per cent in October and then eased to 5.48 per cent and 5.22 per cent in November and December, respectively. However, food inflation soared to 10.87 per cent in October, raising alarm bells, even though it eased somewhat to 5.22 per cent in December. 

Credit Demand

In the first quarter of the current financial year, banks in India registered a credit growth of above 19 per cent. Though this was lower than the 20+ per cent growth in credit between January and March — driven by loans for homes and vehicles, apart from loans against credit cards and jewellery — credit demand remained robust till August-September.

In end-September, credit growth registered by banks stood at 13 per cent, but there was a sudden slump in demand in October, despite the festive season.

Housing sales fell 4 per cent  in 2024 to 4,59,650 units across seven major cities, compared to the previous year. Vehicle sales, including 2/3-wheelers and commercial vehicles, also witnessed a slowdown. The increase in car sales was a mere 5 per cent in 2024 — the slowest in four years.

“Demand for credit has taken a hit and this is directly linked to the slowdown in consumption and investments. Demand for bank credit from industries has not picked up. The government must look at boosting private investments,” Rajiv Kumar, Chairman, Pahle India Foundation and former Vice-Chairman, NITI Aayog, told The Secretariat. 

Meanwhile the RBI has also expressed discomfort on credit expansion of more than 18 per cent, amid a weak deposit growth, emphasising that risks to the financial system could rise with the yawning credit-deposit growth gap.

RBI under Das had also announced several measures that acted as deterrents for banks to lend to non-banking financial institutions (NBFCs). They were also asked to exercise caution in their lending process.

In November last year, the central bank decided to increase risk weightage by 25 percentage points, from 100 per cent to 125, for NBFCs.

Earlier, Finance Minister Nirmala Sitharaman and Commerce and Industry Minister Piyush Goyal had pointed out that high cost of borrowing had led to lower economic growth.

Focus On Consumption

For the government, the immediate challenge is to augment economic growth, for which it will have to carve out ways to spur consumption. Sitharaman, in her forthcoming Budget, is expected to lower tax rates for the salaried middle class, a move that will leave more money in the hands of the end consumers.

Though analysts have opined that economic activity is expected to improve in the second half of this financial year, the Narendra Modi government will have to do a lot more to support growth in the next financial year.