Industry Odisha Bureau, Oct 06: Rate hikes are coming, with most economists expecting a 25 basis-point increase. Yet credit growth stays firm on ample liquidity and strong economic growth. Prolonged tightening could still bite.
Higher borrowing costs normally cool loan demand. India may test that rule this week. Nine of 10 economists in a Mint poll expect a 25 basis-point repo hike. Central banks abroad are tightening amid the West Asia war, inflation risks and trade uncertainty.
Yet bank lending enters this phase in unusually strong shape. Non-food credit has grown 14% or more a year since December 2025. The growth is broad-based across sectors. The question is how quickly tightening can slow it.
A liquidity cushion
Special FCNR(B) deposits have brought in $127 billion. FCNR(B) stands for Foreign Currency Non-Resident (Bank) deposits. The dollars were swapped into rupees, boosting system liquidity. That has pushed short-term interest rates sharply lower.
Banks have leaned less on certificates of deposit, or CDs. These are costly short-term borrowing tools. CD issuance was ₹1 trillion in the fortnight to June 15. It dropped to ₹195 billion by the fortnight to August 31. Issuance picked up again in late September. Cheaper funding has supported margins and lending capacity.
SBI research offers an illustrative estimate. It treats the inflows as roughly ₹12 trillion, with a 2.5 credit multiplier. On that basis, extra credit could exceed ₹25 trillion. At a 7.5% yield, that implies ₹1.8 trillion in gross revenue. These are calculations, not realised lending.
Growth keeps borrowers coming
Interest rates are only one driver of loan demand. The economy is forecast to grow 7% this financial year. Retail inflation remains within the 2–6% band, despite dearer oil and a weaker rupee.
Strong economic growth has overridden high rates before. During 2004–07, credit boomed with lending rates near 12–13%. Real growth then ran at about 8%. RBI research finds credit and growth feed each other.
Banks also dominate corporate finance. Non-food credit made up 62% of commercial-sector resource flows in 2025–26. The corporate bond market remains thin, serving mainly top-rated firms.
Room left to lend
Access to credit remains shallow. The World Bank found 97.6% of Indian firms had bank accounts. Only 21% had a loan or credit line. A 2025 SIDBI survey put the MSME credit gap at ₹30 trillion.
Bank credit reached 61.6% of GDP in 2025–26. It had hovered near 50% for almost two decades. Peers such as China and Vietnam sit far higher.
Margins may widen first
Rate hikes can initially help banks. Most corporate loans float against external benchmarks and reprice quickly. Deposits reprice only as they mature. That gap can temporarily widen net interest margins.
In the 2022–23 tightening cycle, bank margins rose to about 3.7%. Low bad loans also leave lenders less risk-averse.
Where resilience ends
No credit cycle survives prolonged tightening. If oil stays high and rates rise sharply, growth could falter. Weaker growth would then drag on loan demand. A shallow cycle may do little damage. A steep one could.
Liquidity, growth and unmet demand can delay the impact of higher rates. They cannot cancel it.
