India’s Liquidity Surplus Unlikely To Push Up Bank Credit Growth, Say JP Morgan Economists

India’s recent banking system liquidity surplus, which crossed ₹2 lakh crore in early July, may not necessarily translate into accelerated bank credit growth, according to economists at JP Morgan. Their latest analysis suggests that structural and demand-side factors could keep credit expansion moderate despite abundant liquidity in the financial system.

Key Highlights

• Liquidity surplus rose to ₹2.02 lakh crore as of July 3, up from a deficit position seen in May 2025.
• JP Morgan economists believe this surplus reflects short-term treasury flows and government spending patterns rather than underlying credit demand pickup.
• Bank credit growth in FY25 remained stable at around 15.6% YoY, driven mainly by retail and MSME loans, while corporate credit growth stayed tepid.

India Banking System Liquidity Trends

The liquidity surplus surged due to advance tax refunds, higher government spending, and RBI forex interventions injecting rupee liquidity.

Why Liquidity Surplus May Not Boost Credit

1. Weak Corporate Credit Demand:
   Large corporates continue to rely on internal accruals and bond markets for funding capex rather than bank borrowings.
2. High Lending Rates:
   Despite surplus liquidity, lending rates remain elevated due to unchanged RBI repo rates at 6.5%, limiting incremental retail borrowing.
3. Credit-Deposit Growth Gap:
   Bank deposit growth has lagged credit growth in recent quarters, forcing banks to rely on high-cost bulk deposits, impacting NIMs and risk appetite.
4. Structural Shift In Borrowing Behaviour:
   The rise of fintech lending, bond market deepening, and alternative non-bank credit avenues are absorbing parts of the borrowing demand that traditionally flowed to banks.

Economist Perspectives

• JP Morgan India:
  “The current liquidity surplus is driven by transient factors. Its impact on bank credit growth will be limited as loan demand fundamentals remain unchanged.”
• SBI Research:
  “Sustained credit growth revival requires broader private capex cycle pickup, not merely banking system liquidity ease.”

Bank Credit Growth Breakdown FY25

Retail loans continue to be the primary driver, supported by home loans, personal loans, and auto loans, while corporate demand remains muted due to overcapacity in legacy sectors.

RBI’s Monetary Policy Context

The Reserve Bank of India has kept the repo rate steady at 6.5% for over a year to contain inflation while ensuring adequate liquidity to support growth. Economists expect the central bank to remain cautious on rate cuts until headline inflation trends decisively below 4%.

Deposit-Credit Ratio

The increasing credit-deposit ratio signals banks’ limited room for credit expansion without aggressively raising deposits, despite liquidity surpluses in the system.

Impact On Broader Economy

1. Investment Outlook:
   Without a robust pickup in bank credit to corporates, private capex may continue to rely on bond markets and equity financing.
2. MSME Sector:
   Liquidity surplus can support lower funding costs for MSMEs if banks pass on benefits through competitive lending rates.
3. NBFC Competition:
   Banks may face increased competition from NBFCs and fintech lenders in retail segments if their lending rates remain sticky despite surplus liquidity.

JP Morgan Forecast

The bank expects credit growth to remain healthy but not significantly accelerate, driven mainly by retail and small business segments while corporate credit picks up gradually alongside capex announcements.

RBI’s Future Policy Actions

The central bank is expected to deploy tools such as:

• Variable rate reverse repo auctions to absorb surplus liquidity periodically.
• Open market operations to manage durable liquidity.
• Standing deposit facility adjustments depending on forex flows and government spending.

Analyst Advisory

• ICICI Securities:
  “Investors should focus on banks with strong retail and MSME portfolios rather than expecting broad-based credit growth spurts purely from liquidity changes.”
• Motilal Oswal Financial Services:
  “Banks with robust CASA franchises will benefit most as they navigate a high deposit cost environment despite surplus liquidity.”

Conclusion

India’s banking system liquidity surplus, while positive for short-term market stability and government borrowing programme absorption, may not drive bank credit growth upwards meaningfully unless there is a structural pickup in private investment and broader consumption demand. JP Morgan’s analysis underscores the critical role of economic fundamentals over transient liquidity trends in shaping credit growth trajectories.

Disclaimer: This news report is for informational purposes only and does not constitute banking, economic, financial, or investment advice. Readers are advised to consult certified economists, central bank policy statements, and professional banking analysts before making any lending, borrowing, business, or investment decisions based on this content. The publication is not responsible for decisions taken based on the information presented.