Credit growth in India accelerates, but it’s not high

Credit growth has moderated from a low of 16.5 per cent in mid-January 2023, but it is significantly higher than that of the year-ago period, which was hovering at nine per cent.

Credit growth has been driven by continued and sustained retail demand, strong growth in and inflation-induced working capital. Deposit growth in the banking system was only moderated slightly, at 10.1 per cent YoY for the fortnight ended February 24. Deposit accretion increased by 10.2 per cent YoY in the preceding fortnight ended February 10.

February and March are busy periods for banks, which may see a boost to credit growth. Credit growth will be moderate in FY 24 due to a number of factors, such as high base effect, elevated interest rates, and normalization of working capital loans demand by companies.

Despite rising interest rates on their liabilities, deposit accretion may not see a surge, as liquidity in the system remains tight. Deposit growth is a factor in nominal GDP growth, and is expected to be muted going forward.

The credit-deposit growth gap has shrunk to 540 basis points from over 800 bps earlier in the day, but is still quite high.

Over the past few months, their deposit rates have been raised to meet the high demand for credit. Leading Indians have signalled that the momentum in credit growth is likely to continue for a few quarters before it settles down, with the broader capex cycle strengthening. Experts believe that persistently high inflation, moderate growth in the economy, and high interest rates because of rate hikes undertaken by the central bank may blunt the credit growth going into next financial year.