RBI Deputy Governor Swaminathan J said that changes in the repo rate generally take around two quarters to fully pass through to borrowers. As a result, the impact of the latest rate hike on loan interest rates may emerge gradually.
He noted that both weaker demand and higher interest rates could lead to some moderation in credit growth. Even so, a slowdown from the current 18–20% range would still be considered sufficient to support economic activity.
Bank Credit Growth May Move Closer to Sustainable Levels
Bank credit has recently been growing at more than 18%, significantly above its long-term 10-year average of around 12–14%. According to Swaminathan, moving closer to the historical average could create a more sustainable growth path for the banking sector.
Higher interest rates may increase borrowing costs for consumers and businesses. However, the RBI’s upward revision of India’s FY27 real GDP growth forecast to 7.1% indicates that economic activity and credit demand are expected to remain relatively strong.
Canara Bank MD & CEO Brajesh Kumar Singh said that while the repo rate increase could affect funding costs and lending rates, the stronger GDP outlook suggests continued economic momentum and healthy demand for credit.
Higher Rates Could Affect Home Loans and Small Businesses
Indian Overseas Bank MD & CEO Ajay Kumar Srivastava said higher borrowing costs could have an impact on home-loan customers and small businesses.
Banks will therefore need to carefully balance the transmission of higher interest rates with the need to continue providing credit to productive sectors of the economy.
For borrowers, the impact may become more visible as banks gradually adjust their lending rates following the RBI’s policy move.
NBFCs May Face Higher Funding Costs
The rate increase could also affect non-banking financial companies (NBFCs).
Tata Capital MD & CEO Rajiv Sabharwal said NBFC funding costs could rise gradually. However, the extent of the impact will depend on liquidity conditions across the financial system and developments in financial markets.
This means the effect on NBFCs may vary depending on funding sources, liquidity availability and overall market conditions.
RBI Warns Banks About Surplus Liquidity
RBI Governor Sanjay Malhotra said the current surplus liquidity in the banking system may not continue for an extended period.
Several factors, including increased currency leakage, RBI liquidity operations and banks’ reserve requirements, are expected to absorb a significant portion of the excess liquidity during FY27.
As liquidity conditions change, banks could see adjustments in their funding environment and lending strategies.
Caution Over FCNR(B) Deposits
The RBI also highlighted strong inflows into the FCNR(B) deposit scheme. Governor Malhotra advised banks to deploy these funds carefully rather than rushing to lend them.
Banks have been encouraged to conduct proper due diligence and use the funds prudently, even though demand for credit remains strong.
What the RBI’s Credit Growth Outlook Means
The RBI’s latest comments suggest that a moderation in bank credit growth does not necessarily indicate weakness in the economy. Instead, the central bank appears to be focused on maintaining a balance between strong credit demand, borrowing costs, liquidity and the long-term stability of the banking system.
For borrowers, higher interest rates could gradually increase loan costs, while banks may continue to benefit from healthy demand for productive credit if economic growth remains resilient.
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