India’s banks are sitting on a liquidity surplus, but credit growth is still not taking off. According to a new report from J.P. Morgan, more money in the system isn’t leading to more lending.
The report, released on July 4, shows a sharp insight: just having extra cash doesn’t mean banks will give out more loans.
Banks Full of Cash, But Lending Stuck
Since December, the Reserve Bank of India (RBI) has cut interest rates and pumped cash into the system to support growth. The goal was simple—make borrowing cheaper so businesses and people take more loans.
But that hasn’t worked.
In May, credit growth dropped below 10%, showing that loan activity is still slow despite all the surplus money floating around.
What J.P. Morgan Found
Economists Toshi Jain, Sajjid Chinoy, and Divyanit Sood say this: the liquidity surplus helps lower overnight market rates, but it does not push up credit or deposit growth.
“There is no evidence that extra liquidity boosts loans or deposits beyond affecting overnight borrowing rates,” the report says.
So what’s the point of flooding the market with cash if it doesn’t push people to borrow?
Also Read RBI Data: Weighted Average Lending Rate Falls to 9.2% – Is Your EMI Set to Drop?
Too Much Liquidity? RBI Steps In
Recently, overnight rates dropped below the RBI’s repo rate of 5.50%. In some cases, they even fell below the 5.25% floor, called the Standing Deposit Facility (SDF).
To fix this, on Friday, RBI sucked out ₹1 trillion from the system using a seven-day reverse repo deal.
This step was taken to keep interest rates in control and avoid money becoming “too cheap.”
According to J.P. Morgan, RBI should only add or remove liquidity to keep overnight rates near the repo rate. Pumping in extra cash won’t help credit growth, and may only disturb the balance.
Also Read RBI Floating Rate Savings Bonds to Offer 8.5% Interest from July to December 2025
