The payment of around Rs1 trillion by telecom companies to the government after the auction of 3G and wireless broadband spectrum led to a sudden shortage of money in the financial system in early June. The Reserve Bank of India had to step in and pump overnight money into the system through its repo window.

Also See A Mild Credit Crunch Ahead (Graphic)

The general assumption is that the credit tightness will ease once the Rs1 trillion re-enters the banking system after the government spends it in the coming months. But the fortnightly data on the credit and deposit growth by banks is sending out a warning signal. The growth in bank lending has been accelerating since January, thanks to the strength of the economic recovery even as deposit growth is slowing. The credit-deposit ratio, an indicator of how much headroom banks have for their lending activities, has jumped around 2.5 percentage points since the beginning of the year.

The economy could hit a bump if banks continue to increase lending on a sluggish deposit base. Either banks will have to raise deposit rates to attract more money or foreign inflows need to strengthen further to ensure that a mild credit crunch is not a feature of the Indian economy for the rest of this fiscal.

Graphic by Yogesh Kumar/Mint

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