Liquidity surplus, but lending still weak; growth revival key, says Devang Shah

liquidity surplus in the banking system, credit growth remains subdued, raising questions about the disconnect between available funds and actual lending activity. In an exclusive interaction with ET Now, Devang Shah of Axis MF offered a comprehensive explanation, pointing to weak demand, delayed policy transmission, and a still-recovering growth cycle as the main reasons behind the current trend.

“Credit is a direct multiple of what is the demand scenario. If the demand scenario or the overall growth scenario is weakening, somewhere down the line credit growth starts to look weaker,” Shah said, emphasizing that liquidity alone isn’t enough—economic momentum is essential for lending to pick up.

To address the slowdown, Shah noted that both the RBI and the government are working in tandem to revive growth. While the government has limited fiscal space due to its commitment to fiscal consolidation, the RBI has been proactive with monetary policy.

“They are working on propping up the growth cycle… RBI is looking at monetary easing, financial conditions started getting easier. They have delivered one rate cut. We believe that April policy, we should see another rate cut,” Shah stated.

He also pointed to the RBI’s efforts in rebuilding its own balance sheet, which took a hit last year due to falling foreign exchange reserves. With renewed Open Market Operations (OMOs) and potential dividends, Shah expects deposit growth to improve—a precursor to stronger lending.

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“Once the deposit growth starts looking