Credit growth to moderate after RBI rate hike, remain strong enough to support growth

Higher borrowing costs may affect home loans and small businesses, while banks face tighter liquidity and NBFCs brace for a gradual rise in funding costs

The Reserve Bank of India expects bank credit growth to moderate from the current decadal-high level of over 18 per cent following the latest interest-rate hike, but believes the pace will remain strong enough to support economic expansion.

Speaking to reporters after the RBI raised the repo rate, deputy governor Swaminathan J said the impact of the hike on lending rates typically takes about two quarters to be transmitted to borrowers.

"Some moderation will occur relating to demand as well as the rate (hike) together. But the moderation from 18 to 20 per cent (credit growth) is not bad and will be adequate enough to support growth," he said.

Bank credit has been expanding at more than 18 per cent, compared with a 10-year average of 12-14 per cent. Swaminathan said growth closer to the long-term average would be sustainable for the banking system. Bankers said the higher interest rates could raise borrowing costs, but the RBI's upward revision of FY27 real GDP growth to 7.1 per cent pointed to sustained economic momentum.

"Although the increase in the repo rate will play some part in affecting funding costs and interest rates, the upward revision of FY27 real GDP growth to 7.1 per cent reflects good growth momentum and healthy credit demand, making for a conducive environment for the banking system," said Brajesh Kumar Singh, MD & CEO, Canara Bank.

Ajay Kumar Srivastava, MD & CEO, Indian Overseas Bank, said higher rates would have implications for home-loan borrowers and small businesses, while banks would need to balance rate transmission with productive credit demand.

Tata Capital MD & CEO Rajiv Sabharwal said NBFCs could see a gradual rise in funding costs, though the impact would depend on systemic liquidity and market conditions.

RBI governor Sanjay Malhotra said surplus banking-system liquidity was unlikely to persist. Currency leakage (outflow of cash from the banking system to the public), RBI liquidity operations and banks' reserve requirements are expected to absorb a substantial part of the surplus within FY27.

On strong inflows under the FCNR(B) deposit scheme, Malhotra cautioned banks against deploying the funds hastily. Banks, he said, should undertake proper due diligence and deploy the funds prudently, despite strong credit demand.