Last month, the Reserve Bank of India’s (RBI) Financial Stability Report arrived amid a turbulent macroeconomic environment. Oil prices had spiked due to West Asia tensions, the rupee had slipped amid foreign fund withdrawals and RBI’s own inflation forecast had been revised upward.
By the textbook, the central bank should have raised interest rates. Instead, its Monetary Policy Committee held the repo rate steady at 5.25% for the second-straight review, and India’s long bond yields have stayed remarkably placid through it all.
Part of the explanation is deliberate engineering. RBI has opened a swap window for foreign currency non-resident bank deposits and eased the rate ceiling on these, hoping to attract $50 billion or more of non-resident dollars in a few months.
This is similar to RBI’s 2013 rescue that followed the taper tantrum. Bonds are also getting more dollar inflows. This is because the government has scrapped withholding and capital-gains taxes for foreign holders of government securities. Indian bonds might now make it to Bloomberg’s flagship Global Aggregate Index in addition to the two other emerging-market indices they are already part of.
Thus, India is hoping for a durable overseas source of bond demand that will help keep domestic yields low. It is like importing calm from abroad while inflation pressure builds at home. Sustaining this calm has its own costs since absorbing a dollar surge requires RBI to drain the very liquidity created by such inflows.
But today’s global rates are not benign, unlike in 2013. The Bank of Japan has pushed rates to their highest since 1995, closing off much of the cheap-yen carry trade that once pushed capital into markets like India’s. US 10-year yields are holding stubbornly above 4.4%, keeping the India-US rate differential unusually narrow by historical standards.
This combination of an unusually hawkish Japan and a high-yield America might have squeezed emerging-market bonds very hard. That it hasn’t happened to India yet is a policy achievement, engineered rather than accidental.
But a bond market that has been kept calm through clever liability management masks a growing unease in domestic credit demand. The latest Financial Stability Report tells a less comfortable story about households—whose borrowing has been redrawing India’s financial risk map.
Household debt has risen to 45.5% of GDP and is dominated by fast-growing non-housing retail loans. Credit cards, personal loans and gold loans now make up 58.4% of all household borrowing, a share that has been rising every quarter. Nearly half of all household debt is now taken for pure consumption, not for building a home or business.
The report’s own survey of major banks found that loan originations and, tellingly, loan defaults are concentrated among households earning below ₹10 lakh a year, which is precisely the segment with the least room to absorb a shock. The fastest-growing are gold loans, up 42% annually since 2024, driven mostly by existing borrowers pledging jewellery at higher prices to roll over old debt.
Families are monetizing their last financial cushion to stay current on earlier borrowing. That is not resilience. It is a coping mechanism wearing the appearance of credit growth. And what if the value of gold, the pledged collateral, falls sharply?
The savings side of the ledger is just as troubling. Net household financial savings, which touched 11% of GDP in 2020-21, had collapsed to around 5% by 2022-23, and have recovered only partially since.
This has implications well beyond household balance sheets. It is these savings that have traditionally financed the government’s borrowing and companies’ credit needs. With that pool shrinking just as the fiscal deficit is expected to widen this year, the arithmetic gets harder for everyone competing for the same rupee of savings.
There is thus an uncomfortable asymmetry. Interest rates have stayed low and government bond yields are calm, but households—the segment least equipped to handle debt—have taken on record leverage even as their savings buffer diminishes.
The biggest beneficiary of this low-rate regime is not the stressed household. It is the biggest borrower in the room, the government, both at the Centre and in states, whose appetite for debt shows no sign of slowing. Cheap money has financed public deficits comfortably, while addressing private distress. Signs of rising defaults in the small-loans segment aren’t surprising.
For households to deleverage themselves in any meaningful way, real wages and employment need to grow faster than they have. Neither prospect looks assured right now, even as asset and income inequality continues to widen.
Ironically, inequality helps sustain lower rates because higher incomes of the rich cause excess supply of savings, which are piled up as financial assets while the middle and lower rungs continue to borrow just enough to keep pace with the cost of living. Sovereign yields, meanwhile, stay calm despite a spike in inflation risk.
Public policy cannot outsource this problem to monetary policy alone. It needs a sharper macroprudential eye on unsecured and gold-backed lending, a fiscal glide path that doesn’t keep drawing from the same shrinking pool of household savings. And above all, it needs a genuine push for real wage growth and job creation, without which no extent of low interest rates will aid the solvency of Indian households.
The author is senior fellow with Pune International Centre