MUMBAI — Bank lending to the Indian economy may not see a meaningful boost despite the large liquidity surplus in the banking system, economists at J.P. Morgan said in a report on Friday.
Bank credit growth slipped to below 10 percent in May.
While surplus liquidity influences overnight borrowing costs, a recent analysis by the firm showed it does not impact credit or deposit growth in the economy.
The Indian central bank has cut rates steeply and flooded the banking system with liquidity since December as it sought to counter signs of a slowdown in the Indian economy amid modest inflation.
The Reserve Bank of India has said it hopes the combination of rate cuts and easy liquidity would help transmit lower interest rates across the economy and prompt individuals and firms to borrow more.
“We find that the role of liquidity in boosting monetary policy transmission occurs primarily through influencing overnight market rates, within the policy corridor,” J.P. Morgan economists Toshi Jain, Sajjid Z Chinoy and Divyanit Sood said in the study dated July 4.
“There is no evidence of a ‘credit channel’ on deposit and lending growth beyond this.”
The economists added that the findings suggest the central bank should inject or withdraw only as much liquidity as needed to keep overnight rates aligned with the policy repo rate, adding that excess liquidity operations have no independent effect on credit growth
