Credit, deposits, and the market's memory

Why credit revival needs more than RBI support

- PRANJUL BHANDARI

The market's memory can be short. The same time last year we were fretting about weak deposit growth. Today, we are fretting about weak credit growth. We believe one thing is common across both periods. While all eyes look to the Reserve Bank of India (RBI) to help, the central bank can only partly address the problem using the monetary policy levers at its disposal. Instead, the root of the problem—and the real solution—in both instances lies elsewhere: The real economy and the composition of gross domestic product (GDP) growth. Let us explain.

Last year's deposit drag was a two-fold problem—concerns over tepid deposit growth and compositional shifts (too few sticky deposits, too many callable deposits). Once inflation started to fall, the RBI loosened monetary policy, pushing base money growth up. Real deposit growth started to rise in early 2025.

But was the entire problem solved? Perhaps not. The deposit composition problem persists—too much callable bulk corporate deposits and too few sticky retail household deposits. This, we believe, is not in the RBI's control. Rather, it has its root in the real economy. In the few years after the pandemic, returns to capital (i.e., corporate profit growth) was higher than returns to labour (wage growth), and this showed up in savings behaviour.

Fast forward to today and the concern has flipped on its head. Real deposit growth has begun to rise after a period of weakness, but real credit growth has started to fall after a period of strength. There could be many reasons for this, ranging from lower GDP growth to increased risk weights in unsecured lending.