RBI's Liquidity Measures: A Boost for Credit Growth?

The Indian banking sector is set to experience a 10.8% rise in incremental credit to Rs 19-20.5 lakh crore this fiscal year. Icra predicts regulatory easing and liquidity measures will support growth, but challenges in deposit mobilization and high CD ratios might slow down the credit expansion pace.

The Indian banking sector is on track to see a 10.8% increase in incremental credit, bringing the total to Rs 19-20.5 lakh crore this fiscal year, as per a report by rating agency Icra. This marks a slight dip from the 10.9% growth seen in FY2024.

Regulatory easements, including repo rate cuts and changes to the liquidity coverage ratio framework, are expected to foster a supportive environment for credit growth, Icra suggests. Further, the Reserve Bank of India's continued liquidity infusion through open market operations could facilitate quicker rate cut transmission.

However, challenges like persistent deposit mobilization issues and a high credit-deposit ratio pose hurdles. The competition from alternative investment options is reducing the prevalence of low-cost CASA balances, thus affecting banks' cost-effectiveness and potentially delaying the benefits of RBI's rate cuts.

(With inputs from agencies.)