Skewed Bank Lending Until Mid-June

Bank lending in India slowed in the June quarter compared to the same period last year. This likely reflects a cautious approach by businesses in the lead-up to the national elections.

Data from the Centre for Monitoring Indian Economy (CMIE) recorded incremental loan growth for the fiscal year up to June 14th stood at Rs 2.79 lakh crore (1.7%), compared to Rs 3.48 lakh crore (2.5%) a year ago. This indicates a decline in credit demand for both investments and working capital needs, potentially impacting economic activity.

Further evidence comes from the contraction of non-food credit by Rs 68,266 crore during the fortnight ending June 14th. This is a rare occurrence, highlighting the unusual nature of the slowdown.

The CMIE data points to a possible cause: a 20-year low in investment intentions within the manufacturing sector during the quarter. Investment announcements for Q1 2024 were just Rs 44,300 crore, significantly lower than previous years.

Bank of Baroda’s research suggests that despite steady economic growth, elections are likely the primary factor behind this sluggishness. Businesses are likely to adopt a wait-and-see approach before committing to major investments. This cautious behaviour is a departure from past election cycles.

CMIE data on corporate bond issuances further supports this view. Overall issuances had risen from Rs 1.43 lakh crore in Q1-FY23 to Rs 2.86 lakh crore in Q1-FY24, but dropped sharply to Rs 1.73 lakh crore in Q1-FY25. This suggests a decreased appetite for raising capital for large projects.

While policymakers remain optimistic, as indicated by RBI Governor Shaktikanta Das in his April monetary policy statement, the current trend suggests a temporary pause in investment activity due to election uncertainty.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.