Credit Growth Outpaces Deposits, Driving Banks to Short-Term Funding Markets

India's money market has witnessed unprecedented activity, with turnover in the country's largest short-term funding segment reaching record levels as banks scramble to meet robust credit demand. The surge reflects the growing liquidity requirements of lenders at a time when loan growth continues to significantly outpace deposit mobilisation.

According to market data, the value of transactions in the Tri-Party Repo (TREPS) market—accounting for nearly 70 per cent of India's money-market activity—rose to an all-time high of ₹5.5 trillion on May 13 and has remained elevated in subsequent trading sessions. The record turnover underscores the increasing dependence of banks on short-term borrowing to bridge funding gaps.

Strong Economic Momentum Fuels Loan Demand

India's economy has continued to demonstrate resilience despite global uncertainties, including volatility in energy markets arising from geopolitical tensions in the Middle East. Sustained economic activity has translated into strong demand for credit across several sectors.

Major lenders have reported healthy loan growth, particularly from infrastructure-linked industries. State Bank of India (SBI), the country's largest lender, has highlighted robust credit demand from sectors such as power generation, renewable energy projects, data centres, manufacturing and infrastructure development.

The ongoing expansion in industrial and commercial activity has encouraged businesses to seek additional financing, keeping credit growth on an upward trajectory.

Funding Pressures Push Banks Toward Money Markets

The increased reliance on money markets comes as banks face mounting challenges in attracting fresh deposits. Household savings have increasingly shifted toward mutual funds, equities, insurance products and other investment avenues offering potentially higher returns.

As a result, lenders are turning to money-market instruments for liquidity management. Economists note that short-term borrowing through repo and TREPS markets remains one of the most cost-effective funding options available to banks amid rising funding costs.

However, the heightened demand for liquidity has also led to an increase in overnight borrowing rates and short-duration bond yields, reflecting tighter conditions in the banking system.

Credit-Deposit Gap Widens to Two-Year High

Recent data from the Reserve Bank of India indicate that bank credit expanded by 16.2 per cent year-on-year through May 15, marking the fastest pace of growth in nearly two years. Deposit growth, meanwhile, has failed to keep pace with lending activity.

Credit demand has exceeded deposit growth for eight consecutive months, resulting in a widening credit-deposit gap of approximately 400 basis points—the highest level recorded in around two years. The imbalance highlights the structural funding challenge facing Indian banks as they strive to support economic growth while maintaining healthy liquidity positions.

Market experts believe that unless deposit growth improves meaningfully, banks may continue to rely heavily on money-market borrowing and wholesale funding channels in the coming months.

Private Banks Turn Net Lenders in Unusual Market Shift

Adding an interesting dimension to the market, several private-sector banks, traditionally known as net borrowers in money markets, emerged as net lenders during May. Analysts attribute this shift to banks temporarily deploying funds generated through the sale of rate-sensitive investment securities.

The move is believed to be linked to concerns surrounding potential interest-rate adjustments and liquidity management measures aimed at supporting the Indian rupee amid global market volatility.

Such shifts in borrowing and lending behaviour demonstrate the dynamic nature of liquidity management within India's banking sector and underscore how institutions are adapting to evolving market conditions.

Outlook: Liquidity Management to Remain Key Focus

With credit demand remaining strong and deposit mobilisation continuing to lag, liquidity management is expected to remain a key focus area for banks throughout the remainder of the financial year. Market participants will closely monitor deposit trends, Reserve Bank of India policy decisions, and broader economic indicators for signs of easing funding pressures.

While India's banking system remains well-capitalised and fundamentally strong, the recent surge in money-market activity serves as a reminder of the growing importance of efficient liquidity management in sustaining the country's credit-led growth story.