RBI credit reforms: India’s central bank seems concerned about the state of India’s economy
RBI didn’t cut its policy rate in its October monetary policy review, but its other credit easing measures suggest concern about the performance of India’s economy. The irony is that the real challenge lies in pushing up growth in employment and real wages.
It all starts with some signalling, achieved largely through adjustment of liquidity and recalibration of benchmark rates as well as yield curves. Then comes nuanced communication, imploring economic agents to read between the lines, with the hope that this will help mould market expectations.
In the final stage, there is active perception-building with pointed communication—both verbal and printed—to push economic activity along a chosen pathway. This is how many central banks usually try to shift strategy, hoping to nudge borrowers and lenders to act in a certain way. The Reserve Bank of India (RBI) has now added controlled but explicit gesturing to the array of communication tools at its disposal.
The monetary policy announcement of 1 October can be seen as a continuation of governor Sanjay Malhotra’s unique way of conveying economic distress and putting in place policy measures that (he hopes) will lead to higher lending and borrowing, and thereby induce stronger economic growth. The central bank is no longer beating about the bush; its concern for the economy is visible front and centre.
There was a broad-based expectation of an interest rate cut on the street, seen as the ideal cure for a slowing economy. But members of the monetary policy committee (MPC) felt otherwise, given that earlier rate cuts were yet to fully pass through the economy.
In addition, the prevailing uncertainty over how the fiscal stimulus and US tariff tantrum would play out on consumption and production stayed the MPC’s hand. But then, RBI’s tool-kit had other instruments it could throw at the problem.
It has initiated a large number of reform measures through a suite of regulatory relaxations that it hopes will spark off a fresh bout of lending through banks and non-banking financial companies (NBFCs), thereby providing some financial tailwind to torpid growth impulses.
The easing of previous strictures on lending for capital market operations—loans against shares or borrowing to finance mergers and acquisitions—mark the crossing of a new threshold. Many of these restrictive rules have been in place for many years, defying logic and carrying the stench of an older economic era.
The reversal of the August 2016 policy limiting concentration risk is also significant, since it looks to provide an impetus to large corporate borrowing. Part of the design also aims to send lending business, which had migrated to the private credit market, back to scheduled banks and NBFCs.
The message emerging from Mint Street: yes, Houston, there is indeed a problem, but we are trying to sort it out with some reform measures, rather than depending solely on interest rate cuts.
Governor Malhotra’s tenure so far, just short of a year, has been marked by an extraordinary drive in overhauling the central bank’s past policy frameworks, and that has also included reversing some earlier decisions. His April 2025 policy announcement, for example, marked a distinctive strategy pivot.
It heralded, in many ways, a formal shift in RBI’s monetary policy from rigorous inflation control—which began with the post-pandemic consumption boom and was intensified after the start of the Russia-Ukraine war—to crafting a demonstrable framework for fostering growth.
The motivation probably came from the central bank’s internal economic assessment, following which the April policy statement lowered its gross domestic product (GDP) forecast for 2025-26 to 6.5%. While the full year’s forecast has now been bumped up to 6.8% (largely because of the 7.8% print in April-June), RBI’s guidance shows growth tapering during the remaining quarters.
There is another point to note: the central bank’s six-monthly monetary policy report, issued with the October policy, has forecast even lower GDP growth at 6.6% for 2026-27.
This is not to say that the MPC is averse to interest rate action: it cut benchmark rates by 100 basis points between February and June 2025, with the last cut coming in at 50 basis points. RBI data, however, shows that interest rates on both outstanding loans as well as new ones have not fallen to the full extent, thereby prompting the MPC to defer a rate-cut decision.
Another source of anxiety could be traced to the central bank’s survey of capacity utilization in the manufacturing sector: 74.1% during April-June, which is perilously close to the long-term trend-line of 73.9% (from the first quarter of 2008-09 to that quarter of 2025-26, excluding the first quarter of 2020-21). This indicates some measure of industrial stagnation, which explains muted demand for fresh private sector capital expenditure.
Ironically, while slow credit growth has caught everybody’s attention, a GDP growth slowdown makes the credit-to-GDP ratio appear not so dismal. Data from the Bank for International Settlements shows India’s credit-to-GDP ratio at 93.3% as of March 2025. This is better than many of its peers in emerging and advanced economies: Greece, Mexico, Brazil, Turkey, South Africa, Poland and Indonesia.
Interestingly, the data also shows India’s credit-to-GDP gap—the difference between current credit-to-GDP ratio and the long-term trend—at only minus 2.7%, indicating that credit growth is only marginally below its trend-line.
This begs the question whether a credit stimulus is really necessary to spur GDP growth when efforts should actually be focused on the real economy, especially on employment trends and real wage growth.
The author is a senior journalist and author of ‘Slip, Stitch and Stumble: The Untold Story of India’s Financial Sector Reforms’ @rajrishisinghal
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