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Credit growth in the banking system has moderated further, growing at 15.5 per cent year-on-year (YoY) in the fortnight ended February 24, to Rs 134.50 trillion, latest data released by Reserve Bank of India (RBI) showed.
While credit growth has moderated from about 16.5 per cent in mid-January (2023), it is significantly higher than that of the year-ago period, which was hovering at nine per cent.
Credit growth has so far been driven by continued and sustained retail demand, strong growth in NBFCs and inflation-induced working capital. Meanwhile, deposit growth in the banking system also moderated marginally, at 10.1 per cent YoY for the fortnight ended February 24. In the preceding fortnight ended February 10, deposit accretion grew at 10.2 per cent YoY.
February and March are generally busy periods for banks, which may see a pick-up in credit growth again. That said, credit growth will moderate going into FY24 due to a host of reasons such as high base effect, elevated interest rates, and normalisation of working capital loans demand by companies.
Similarly, deposit accretion may not see a sharp spike despite banks raising interest rates on their liabilities, as liquidity in the system remains tight. Also, deposit growth is a factor of nominal GDP growth, and that is expected to be muted going forward.
The credit-deposit growth gap has now shrunk to 540 basis points from over 800 bps earlier, but is still quite high.
Banks have raised their deposit rates consistently over the past few months to garner durable liquidity to meet the high demand for credit. Leading Indian banks have signalled that the momentum in credit growth is likely to continue at least for a few quarters before it settles down, with the broader capex cycle strengthening. Experts believe persistently high inflation, moderation in overall growth in the economy, and high interest rates because of rate hikes undertaken by the central bank, may blunt the sharp credit growth going into next financial year.
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