Is Credit Demand Really Slowing? RBI's Liquidity Push Tells A Different Story

With inflation pressures easing due to food, some believe RBI still has space to act

- SRINIVASAN VARADARAJAN & KANIKA PASRICHA

quarter (Q1) accretion nearly half of what it was in Q1FY25. But here's the key question: Has credit demand actually fallen? And more importantly, what's the right metric to assess it? Do we measure credit through the borrower's need for funds, or through the volume of credit disbursed by a specific channel, like banks?

While bank credit volumes are central for equity analysts tracking banks, should they hold the same primacy in a macroeconomic assessment? When the central bank calibrates system liquidity in line with its monetary policy stance, its objective is to ensure adequate credit flow to productive sectors of the economy. Importantly, the central bank should remain largely agnostic about which channel—banks, non-banking financial companies (NBFCs) and capital markets—provides this credit. The transmission of policy rates and liquidity impulses varies across the channels, influencing the volume of credit each one delivers. Another key factor is each channel's capacity to meet the credit needs of different borrower segments. Let's unpack this.