India Money Market Volumes Reach Record High Amid Surge in Bank Lending

India's Money-Market Turnover Hits Record Amid Booming Credit Demand

India's money-market turnover has reached a record high, driven by state-owned lenders stepping up borrowing to fund rapid credit demand. According to Bloomberg-compiled data, the value of trades in the tri-party repurchase segment, which accounts for approximately 70% of the nation's money markets, reached an all-time high of 5.5 trillion rupees ($57.8 billion) on May 13 and has remained elevated since.

India's economic growth has held up well despite the energy crisis caused by the US-Iran war, maintaining robust credit demand. State Bank of India is experiencing strong loan uptake from sectors including power, renewables, and data centers, Chairman CS Setty noted. However, the funding rush has pushed up overnight borrowing costs and short-term bond yields in recent weeks, highlighting banks' ongoing struggle to attract deposits as household savings flow into other investment products.

The money market "provides the cheapest source of funds available" during a period when the cost of funds for banks is experiencing upward pressure, said Kanika Pasricha, chief economist at Union Bank of India. Bank lending expanded at 16.2% in the year through May 15, the fastest clip in two years, with credit demand exceeding deposit growth for the eighth consecutive month, according to the latest central bank data. The credit-deposit gap widened to approximately 400 basis points, the most in about two years, the data show.

Read also: India to Acquire Largest Military Drone Fleet Worth Over $2 Billion from Domestic Manufacturers

Private banks, traditionally net borrowers, unexpectedly pivoted to being lenders in May, according to an analysis by the Clearing Corp. of India. This shift appears to be a result of banks temporarily deploying proceeds from the sale of rate-sensitive investments amid concerns of a currency-defence-driven rate hike, said Tanay Dalal, an economist at private sector lender Axis Bank.