Rate Cuts, Rupee Infusions & a Lukewarm Loan Market—RBI Faces a Lending Paradox

Image Source: ET Government

India's banking sector is awash with liquidity with the Reserve Bank of India (RBI) having released a record wave of fund supplies until 2025. However, despite sharp rate reductions and multiple rounds of liquidity injections, credit growth has been slow, putting a cloud over the effectiveness of monetary transmission in the current situation.

Key Highlights Historic Liquidity Steps:

RBI has injected over ₹15.5 lakh crore into the system since December 2024 via open market operations, forex swaps, and CRR cut.
The CRR was reduced by 50 basis points in December 2024, with a pledge for a phased reduction of 100 basis points in 2025, injecting additional liquidity into banks.
The excess liquidity actually led the central bank to drain ₹7 lakh crore in the near term by end-June, but most of the funds returned to the system soon.

Muted Credit Uptake:

Expansion in non-food lending eased to 9.8% YoY in May 2025 from 16.2% during the same period last year—even while borrowing costs fell by around 20 basis points.
Industry lending is especially subdued, posting only 4.9% YoY growth as of May 2025.
Analysts caution loan expansion to further slow down to 7–8% as of March 2026 due to a shortage of demand rather than funding issues.

Transmission Slowdown:

100 basis points of rate reductions, including the surprise 50 basis point reduction in June, have not provoked a strong lending response.
Banks are placing surplus funds in RBI's Standing Deposit Facility, usage doubling in a year, indicating weak credit demand amid plenty of liquidity.

Experts Weigh In

J.P. Morgan summarizes that liquidity "does not cause credit growth" but loan demand will tend to create the demand for liquidity, not the other way around.
Fitch Ratings confirms that increased accessible liquidity has reduced deposit costs, but slow loan growth eases pressure on banks to mobilize fresh deposits.

RBI Response:

While policymakers maintain an “accommodative” stance, the RBI is expected to continue heavy infusions to offset ongoing deficits, especially amid tax outflows and global financial uncertainty.

Source: Indian Express, Angel One, The Economic Times