For the first time in over three years, deposit growth in India has surpassed credit growth, signaling a shift in banking liquidity and RBI-led monetary policy outcomes. 

In a significant shift for India’s banking sector, deposit growth has outpaced loan growth for the first time in over three years, as reported for the fortnight ending May 30, 2025. According to recent data, deposits grew by 9.9% year-on-year (YoY), while credit growth slowed to 8.97%, marking the lowest credit expansion in three years. This development, influenced by the Reserve Bank of India’s (RBI) monetary policy measures, signals a recalibration of the banking system’s liquidity dynamics. With the RBI’s recent policy rate cuts and a reduction in the Cash Reserve Ratio (CRR), banks are navigating a landscape of improved liquidity, reduced dependence on high-cost bulk deposits, and a cautious approach to lending. This article explores the factors driving this trend, its implications for banks, depositors, and the broader economy, and the RBI’s role in shaping these dynamics.

The Shift in Credit-Deposit Dynamics

For much of 2024, the Indian banking sector grappled with a significant gap between credit and deposit growth. Loan growth consistently outpaced deposit growth by an average of 2.0 percentage points, pushing the loan-to-deposit ratio (LDR) above 80%. This elevated LDR raised concerns at the RBI, as it indicated potential liquidity risks and asset-liability mismatches. By August 2024, the LDR stood at 77.2%, reflecting tight liquidity conditions driven by robust credit demand, particularly in retail and unsecured lending segments. However, by May 2025, the gap had narrowed significantly, with deposit growth at 9.9% surpassing credit growth at 8.97%, reducing the LDR to 78.9%. This alignment is primarily attributed to a slowdown in credit growth rather than a significant acceleration in deposit accretion.

The decline in credit growth is partly seasonal, as the first quarter of the fiscal year typically sees subdued borrowing activity. Companies often plan their borrowing strategies during this period, while retail loan demand, particularly for home and personal loans, tends to surge in the second half of the fiscal year due to festive seasons. Additionally, the RBI’s regulatory measures, such as increased risk weights on unsecured loans and microfinance lending, have prompted banks to tighten credit appraisal processes, further moderating loan growth.

RBI’s Policy Measures and Liquidity Infusion

The RBI has played a pivotal role in addressing the credit-deposit disparity through targeted monetary policy actions. In June 2025, the RBI reduced the repo rate by 50 basis points to 5.5%, marking the third consecutive cut in 2025, bringing the total reduction to 100 basis points from 6.5%. This move aimed to stimulate economic growth amid global uncertainties, including a 26% tariff on Indian exports imposed by the US government. Additionally, the RBI lowered the CRR by 100 basis points from 4% to 3%, implemented in four 25-basis-point tranches starting September 2025. This reduction is expected to inject approximately ₹2.5 trillion into the banking system, enhancing liquidity and enabling banks to expand lending capacity.

The repo rate cut lowers borrowing costs for banks, which typically pass on these benefits to consumers through reduced lending rates. For instance, home loan rates are expected to become more attractive, potentially boosting demand in the real estate sector. However, this also impacts deposit rates, with banks reducing fixed deposit (FD) rates by 30-70 basis points since February 2025. The Standing Deposit Facility (SDF) rate was adjusted to 5.25%, and the Marginal Standing Facility (MSF) rate to 5.75%, further aligning monetary policy with the goal of maintaining economic growth while keeping inflation in check, which stood at 3.16% in April 2025.

Deposit Growth and Changing Depositor Behavior

The banking sector’s deposit growth has been a focal point of concern, particularly as households increasingly diverted savings to alternative investment avenues like mutual funds, insurance, and capital markets. In 2024, deposit growth lagged at 11.1% YoY compared to credit growth of 17.4% as of June 28, 2024. This diversion, coupled with tight liquidity, forced banks to rely heavily on high-cost bulk deposits and certificates of deposit (CDs), which strained net interest margins (NIMs). Bulk deposits, often sourced from companies and fund houses, come with higher interest rates, squeezing banks’ profitability.

However, recent developments indicate a reversal. By October 2024, deposit growth reached 11.74% YoY, outpacing credit growth at 11.52%. This trend continued into May 2025, with deposits growing at 9.9% compared to credit growth of 8.97%. The RBI’s liquidity infusion and cooling equity markets have reduced the allure of alternative investments, encouraging retail depositors to retain funds in banks despite lower FD rates. Banks have also adopted innovative strategies, such as leveraging Jan-Dhan accounts and offering allied services, to mobilize deposits, particularly among private sector banks.

Impact on Banks’ Net Interest Margins

The reliance on high-cost bulk deposits in 2024 significantly impacted banks’ NIMs, as the cost of funds rose faster than lending rates. However, with improved liquidity and reduced dependence on bulk deposits, banks are now cutting deposit rates, particularly for retail and bulk deposits. Major banks have already lowered FD rates following the RBI’s repo rate and CRR cuts, with expectations of further reductions to protect margins. This strategy is critical as banks are mandated to transmit policy rate cuts to lending rates swiftly, which could reduce yields on loan assets.

The cautious approach to lending, driven by concerns over asset quality, particularly in microfinance and unsecured retail loans, has also contributed to margin stability. The RBI’s Financial Stability Report noted a moderation in these high-risk segments, with banks recalibrating growth to mitigate non-performing asset (NPA) risks. For instance, microfinance institutions have been urged to slow loan growth due to rising NPAs, ensuring a balanced approach to credit expansion.

Retail Depositors and Market Uncertainty

Retail depositors face a trade-off between safety and returns. While FD rates have declined, the uncertainty in equity markets and other investment avenues has kept depositors anchored to banks. Historically, Indian retail depositors have prioritized safety, willingly accepting lower returns for the security offered by bank deposits. This behavior is expected to persist in 2025, reducing banks’ need to compete aggressively on deposit rates. The RBI’s emphasis on prudent liquidity management and diversified funding sources further supports this stability, as banks explore long-term borrowings and capital market instruments to reduce reliance on short-term, high-cost deposits.

Sectoral Implications and Economic Outlook

The alignment of deposit and credit growth has broader implications for the Indian economy. Lower lending rates are likely to stimulate demand in sectors like real estate, auto, and capital-intensive industries, as cheaper loans encourage borrowing. The RBI’s State of the Economy report highlights strong domestic drivers, including private consumption and gross fixed investment, supporting GDP growth in Q1 2025. However, import-dependent sectors may face challenges due to a weaker rupee following rate cuts, which could increase costs.

Analysts project credit growth to rebound to 11-12% by the end of FY25, potentially surpassing expectations if festive season consumption and corporate borrowing gain momentum. The RBI’s liquidity infusion provides banks with ample funds to pursue low-risk lending opportunities, particularly in home loans, where asset quality is generally robust. Small and medium enterprises (SMEs) are also expected to benefit from increased credit availability, supporting economic growth.

The Indian banking sector is at a pivotal juncture in 2025, with deposit growth surpassing loan growth for the first time in over three years. The RBI’s strategic interventions, including repo rate and CRR cuts, have alleviated liquidity constraints, reduced banks’ reliance on high-cost bulk deposits, and stabilized the credit-deposit gap. While credit growth is expected to rebound, banks’ cautious approach to lending and focus on asset quality will ensure sustainable expansion. Retail depositors, prioritizing safety amid market uncertainty, are likely to remain with banks despite lower returns. As the financial year progresses, the banking sector is well-positioned to support economic growth, with improved liquidity and prudent management paving the way for a balanced and resilient financial system.