Weekly RBI Tracker: Banking Credit Growth improves

Credit Growth improves in the first data release since RBI’s jumbo rate cut.

The latest data release from RBI indicates that after falling to a 3 year low, the banking credit growth has shown improvement in the fortnight ended 13^th June. This is the earliest sign of impact of RBI’s jumbo 50bps rate cut in early June.

The week also saw India’s forex reserves moderating mildly but still close to USD 700bn. The USD 1.0 bn fall in forex reserves was spread equally across gold reserves and foreign currency assets.

Credit Growth Picks Up – First sign of monetary easing taking effect:

As per the latest release of credit growth data from RBI, India’s banking credit growth has improved to above 9.5%. This has happened after a rather sharp fall in credit growth in the prior month as it dipped from above 10% to the lowest levels in three years of less than 8%.

Despite the rates cuts by RBI in 2025, prior to the current data release, they fell short of improving the credit growth. Anaemic demand for credit, coupled with lack of speedy transmission of rate cuts was the likely culprit. In a surprising move, the RBI had cut the repo rate by more than 50bps in the first week of June. The latest data release contains the first impact of the rate cut announcement; and it has shown an improvement.

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 has improved after falling sharply in the prior month.

Source: RBI

Despite the pickup in credit growth, banks continue to park their money in SDF:

Despite the modest pickup in credit growth, banks continued to increase their SDF balances. As per the latest data, the average 20D SDF balances increased further to INR 2.25 trn. 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 2.25 trn.

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 – A modest increase:

Likely buoyed by a pickup in credit growth, credit to deposit ratio also witnessed a modest increase. The increase has happened despite a modest pickup in deposit growth too.

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 witnessed a modest increase to ~78%.

Figure: Credit Deposit Ratio Drops

Source: RBI

Forex Reserves fell by ~USD 1 bn:

As per the latest RBI data, India’s forex reserves fell by USD 1.0 bn week over week to USD 697.9 bn. The modest decrease was due to a decrease in both gold reserves as well as foreign currency assets. The total value of gold reserves decreased by USD 0.5 bn to USD 85.7 bn. The total value of foreign currency assets decreased by USD 0.5 bn to USD 589.1 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 fell modestly

Source: RBI

RBI’s repo rate history:

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 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.

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.

The latest banking credit growth data also showed that the RBI’s monetary easing may already be impacting credit growth positively. Banking credit improved to 9.5%+ after falling in the prior month to the lowest growth in more than 3 years.

Figure: 100bps Repo Rate in 2025

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.