Mumbai, July 4, 2025 — Despite a substantial liquidity surplus in India’s banking system, credit growth remains subdued, according to a report released by JP Morgan economists. The study suggests that excess liquidity has limited impact on deposit and lending expansion, challenging assumptions about its role in stimulating economic activity.
JP Morgan’s analysis indicates that while surplus liquidity affects overnight borrowing rates, it does not translate into broader credit or deposit growth. The economists—Toshi Jain, Sajjid Z Chinoy, and Divyanit Sood—assert that the transmission of monetary policy occurs primarily through the overnight rate within the policy corridor, rather than through
The Reserve Bank of India (RBI) has implemented aggressive rate cuts and injected liquidity since December 2024 to counter economic slowdown and modest inflation. However, bank credit growth fell below 10% in May, underscoring the limited effectiveness of these measures in boosting lending.
To prevent overnight rates from falling below the policy threshold, the RBI withdrew ₹1 trillion ($11.7 billion) from the banking system on July 4 via a seven-day variable rate reverse repo operation. This move follows similar interventions aimed at maintaining the sanctity of the operating target.
India’s policy repo rate currently stands at 5.50%, with the Standing Deposit Facility (SDF) rate at 5.25%, forming the lower bound of the interest rate corridor.
JP Morgan recommends that the central bank calibrate liquidity injections strictly to align overnight rates with the policy repo rate. The report cautions against relying on surplus liquidity as a standalone tool for credit expansion, emphasizing that such operations have no independent effect on lending or deposit growth.
As India navigates a delicate economic phase, the findings call for a more nuanced approach to monetary policy, focusing on structural reforms and demand-side interventions to stimulate credit uptake.
