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India Ratings and Research in its latest report has said that the surprise rate hike by the RBI signalling a reversal of the interest rate cycle will weigh down on the banking system's credit growth, which was showing signs of revival with an 11 per cent growth. It said the tailwinds supporting a pick-up in credit growth will be in demand from the industry and services segments, even as growth in the agriculture segment remains stable and muted in the retail segment.

It added that over the medium term, inflationary pressures, supply chain disruptions and a weak consumption demand could upset the current revival in credit growth. It said ‘…the reversal of the interest rate cycle as signified by the 0.40 per cent increase in repo rate by the Reserve Bank of India would weigh down on the credit growth as borrowings become costlier’. It noted that it has received feedback from the companies rated by it, which points to a delay in capital expenditure plans as they await more clarity on the macroeconomic front.

It said that banking system credit growth off take has shown a significant pick-up in the early part of FY23, with credit growth of 11.2 per cent as of April 8, 2022, compared to 5.3 per cent in the same period in 2021, and added that this is the highest since July 2019. The agency believes that while the second Covid wave had significantly impacted the credit outlook in 2021, the outlook reasonably normalised at the beginning of 2022.