With the repo rate being lowered by 125 basis points (bps) within this year and bank lending rates coming down, there is strong reason to believe that lending should pick up substantially, according to conventional wisdom. In this context, it is useful to see how the system has reacted in the past to the lowering of the repo rate.

Data for the last 15 years reveals an interesting picture. Growth in credit tended to be the highest when the repo rate was increased. During FY10-12, it averaged 18.8% when the repo rate was increased by 350 bps to 8.5%. In FY19, when the rate was increased from 6 to 6.25%, credit grew by 26.6%. The next highest growth rate was in FY24, when the repo rate was increased by 250 bps as credit grew by 17.8%.

Reduction in repo rate in phases such as FY13, FY14-18, and FY19-22 did not witness an upsurge in bank credit growth. The last period was during the Covid-19 phase as banks went all out to provide credit to customers with several schemes also being engineered by the government through the guarantee and targeted repo operations. Yet, growth tended to be sluggish—merely 6.8%.

The answer really lies in demand for credit. Entities borrow money only when there is a necessity. Therefore, a deep dive shows, there have been differential responses across sectors to the repo rate changes. Industry has responded with less alacrity when demand for their products was sluggish, meaning there was spare capacity in several segments. However, when credit growth was high in periods of high repo rates, it did not matter really as the economy........

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