J.P. Morgan warns bank credit growth won’t keep pace with liquidity surplus

Despite an unprecedented liquidity glut in India’s banking sector, J.P. Morgan economists caution that this won’t translate into higher bank credit growth. The Reserve Bank of India (RBI) has facilitated this liquidity via rate cuts and reverse repo operations, reducing overnight borrowing costs. However, credit growth remains subdued—below 10% in May—as the excess funds favor short-term rate stability rather than fueling lending. The economists suggest RBI should precisely calibrate liquidity via tools like reverse repos to maintain policy rate alignment, rather than relying on blanket rate cuts. With the current policy repo rate at 5.5% and the standing deposit facility at 5.25%, this nuanced monetary management is critical as the economy shows mixed growth signals.