The green shoots of growth in credit against lagging deposit growth calls for more proactive liquidity management, according to a report from State Bank of India’s research department. The report highlighted the rising gap between credit growth and deposit growth of the banking system. Credit growth was 11.3% for the fortnight ended October 31, while deposit growth was at 9.7%. The credit growth picked up during the festive season, though it was lagging in the first quarter.
The report also noted higher yield on government bond despite 100-bps rate cut. Considering the g-sec supply worth Rs 1 lakh crore each month till February 2026 and larger state bond issuances, yields will move in range, the report said. With the cancellation of auction of seven-year government bonds earlier this month, the RBI clearly indicates that it is not comfortable with higher yields.
The report further stated that the RBI has changed its intervention strategy by relying more on the non-deliverable forward (NDF) markets rather than the spot market to manage volatility as it would not impact the liquidity. It said that the RBI’s recent secondary market open market operation (OMO) may be a tactical move to offset the durable liquidity drain caused by its foreign exchange interventions.
The SBI report emphasised on the role of communication in effectiveness of monetary policy. “The central bank could continue to navigate through the chequered road much successfully if its communication continues to create an unwavering culture of openness, consistency and confidence in sync with its jurisprudence and formidable actions that have ensured Indian markets grow sans volatility.”