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The Reserve Bank of India’s efforts to inject liquidity can only be an enabler and not a prime mover in improving the credit growth of the Indian banking system, according to a report on banking by SBI Capital.
“RBI has kept the liquidity tap flowing with a cumulative OMO of over Rs. 5 trillion in 2025. However, historically, liquidity has boosted deposit more than credit growth. Hence, liquidity can only be an enabler not prime mover of credit, and can lead to bubbles,” the authors of the report found.
To be sure, the lag between credit and deposit growth were converging, data in the report found. The credit growth was over 10% in fiscal 2025, and deposit growth dipped to 11% in fiscal 2025, as against 16.3% in the previous fiscal.
“The gap between credit and deposit growth in the Indian banking system has narrowed over the past few quarters. This is partly due to a slight pick-up in deposit growth and also because credit growth has slowed — a result of both demand-side moderation and some supply-side constraints,” said Shrikant Chouhan, Head of Research at Kotak Securities.
The increase in liquidity does not have a direct impact on credit said, Anitha Rangan, Economist at Equirus Securities, Economist at Equiris Securities. “Neither rates nor liquidity can induce credit growth. Okay, credit growth actually comes when there is a demand for credit. Demand for credit comes when there is an underlying growth in the economy,” Ms. Rangan said.
The credit growth will not happen when nominal GDP growth is lesser than 10%, Ms. Rangan said, adding that for a meaning full increase in credit growth to take off both public and private capital expenditures to take-off.
Published – May 23, 2025 08:45 pm IST
