RBI not in favour of runaway credit growth, says real interest rates still “quite high”

Mumbai: The Reserve Bank of India is not in favour of credit growth running ahead of economic fundamentals and is comfortable with the current pace, roughly in line with GDP, even as the central bank does not set explicit targets for either credit expansion or economic growth, Governor Sanjay Malhotra said.

“Last 10 years, it's (credit growth) been more or less 1x (the GDP growth) and we have done well,” Malhotra said at the post policy conference on Friday, adding that the real growth rate is about 7%.

“When one talks about 2x growth, those are the times before 2011-12. Earlier, we used to have very high credit growth rates and you did see what impact it had on bank asset quality. So, I don't think 2x is the kind of number that we are looking at,” he said.

The rate of growth is dependent on the structure of the economy, Malhotra said, adding that the Monetary Policy Committee (MPC) or the central bank cannot accelerate or decelerate the rate of growth of the economy and credit.

India's real GDP grew at a six-quarter high of 8.2% in Q2 of FY26. Today, the RBI projected real GDP growth for FY26 at 7.3%, with the figure for Q3 estimated at 7.0% and for Q4 at 6.5%. Real GDP growth for Q1 FY27 is seen at 6.7%.

For the quarter ended 14 November, 2025, credit growth for the banking system grew 11.3% on year to ₹198 trillion, as per latest RBI data.

Non-food bank credit had grown 12.0% in FY25, slower than 16.3% in the previous year. In comparison, India’s GDP grew at a four-year low of 6.5% in FY25, sharply lower than 9.2% in FY24.

As such, the governor expects the impact of US tariffs-led disruptions and other geopolitical factors to be minimal on India's growth as the economy is primarily “domestic demand-driven". The recent relief measures announced by the RBI and the government for certain export-linked sectors should support growth.

“I think this is an opportunity for us, and exporters have already started looking out, and improving not only their productivity but also diversifying, etc. We should be able to come out of this stronger,” Malhotra said.

Market participants believe the liquidity measures worth around ₹1.45 trillion announced on Friday will help support credit growth.

Sarvjit Singh Samra, managing director and chief executive officer of Capital Small Finance Bank, believes that the rate cut and policy announcements will create greater room to deepen lending to MSMEs, retail borrowers, and rural economy.

“This rate cut is likely to stimulate demand for retail credit, particularly among small businesses and the housing sector, as lower borrowing costs enhance affordability and reduce repayment pressure,” said Rajesh Sharma, managing director of retail-focussed NBFC Capri Global.

V.P. Nandakumar, managing director and chairman of Manappuram Finance, said lower policy rates usually work their way into borrowing costs across home loans, autos, MSME credit and working-capital financing, helping households and small businesses manage their cash flows more comfortably, even though full transmission might take a few weeks.

Rate transmission on track

RBI's rate-setting panel on Friday lowered the policy repo rate by 25 basis points to 5.25% in a unanimous decision. The committee also retained the "neutral" policy stance.

The governor said that transmission of the policy rate cuts is on track and slower reduction in fresh rupee loans is an indication of an increase in the share of yielding loans and not slower transmission.

“Interest rate effect is now 79 basis points, but if the proportion of higher interest rate loans loans, like for example retail loans that are unsecured or gold loans, if their proportion goes up the average interest rate goes up. It does not mean that transmission has slowed,” he said.

Excluding the latest 25 bps rate cut, the RBI has reduced the policy rate by a cumulative 125 bps since February 2025. In response, the weighted average lending rate (WALR) of banks has declined by 69 bps for fresh rupee loans during February-October 2025, whereas the interest rate effect is 78 bps.

The moderation in the WALR of outstanding rupee loans has been to the extent of 63 bps, with transmission being broad-based across sectors, the governor said.

However, data by RBI showed that the WALR on fresh rupee loans has been volatile, dipping to 8.62% in June 2025 before rising to 8.81% in July. The rate touched a low of 8.5% in September before inching up to 8.64% in October 2025.

This is why it is important to look at the interest rate effect and not whether interest rates have come down for different segments of loans, given that different categories of loans have varied interest rates, Malhotra explained, citing the example of secured housing loans that tend to carry a lower rate of interest of around 7-8% compared with 10-11% loan rate for unsecured retail loans.

“If the share of those loans goes up, going forward, then the average interest rate goes up even though the interest rate on each and every segment of the loan has come down,” Malhotra said.

Asked about the slower transmission on the liability side compared with lending rates, Malhotra said it is crucial to look at real interest rates when inflation is so low and is expected to remain low. “Even though the nominal interest rates may seem to be low, the real interest rates today are quite high. That's true not only for borrowers but also for savers. So, we do expect that going forward, especially after this repo rate cut, deposit rates will to some extent moderate.”

The weighted average domestic term deposit rate (WADTDR) on fresh deposits has declined by 105 bps, while that on outstanding deposits has softened by 32 bps over February-October.

The latest data for October on interest rates indicate that all bank groups have increased lending rates on fresh loans by 9-18 bps, while reducing fresh deposits rates by 4-5 bps, as per SBI's 'Ecowrap' research report. "With this rate cut, banks would have to revisit their ALM (asset-liability management) position, calibrating against challenges on both resources mobilization and credit off-take," the note said.

Asset quality not a worry

Confident of credit growth sustaining, RBI’s comfort also stems from steady asset quality trends and controlled growth in unsecured loans that have so far shown no signs of concern, Deputy Governor Swaminathan J. said at the press meet.

In addition to year-on-year growth rate for credit, the RBI also tracks relative growth of each loan segment with other segments and slippages in each portfolio, Swaminathan said, adding that the earlier measures on unsecured loans were taken at a time when such loans were growing at almost twice as that of the rest of the portfolios.

The overall credit growth is around 10-11%, wherein lending to large industries is around 10%, home loan growth is 11% while personal loans are up about 14%.

“The growth has been seen more in secured segments like gold loans or home loans, and unsecured loans have significantly moderated. So, there are no indicators at this point in time which are creating a concern for us,” Swaminathan said.

Although there was a slight uptick of around 8 bps in slippages in unsecured loans in the September quarter, the overall retail loans have not shown any deterioration, he said, adding that unsecured loans today constitutes less than 25% of the overall retail book and around 7-8% of entire banking system credit.

“A few bps marginal uptick is not a matter of concern,” the deputy governor said, adding that the situation does not warrant regulatory intervention. RBI will keep tracking incoming data, but does not plan to take any measures at this point in time, he said.

In November 2023, RBI had increased the risk weights on bank loans to unsecured retail and personal loans and to non-bank lenders by 25 percentage points, citing unprecedented growth in these segments. This had resulted in a considerable slowdown in bank credit to these segments over the last two years - from 27-29% in September 2023 to 9-12% in March 2025, as per RBI's June 2025 Financial Stability Report. The higher risk weights on bank loans to NBFCs were reversed from 1 April 2025.