India's quantitative tightening

The persistent gap between credit and deposit growth has perplexed many. Could it be due to shortfalls in money injection by the RBI?

Over the past year, deposit growth in the Indian banking system has persistently lagged loan growth, with deposits growing just 10 per cent, compared to strong 15 per cent-plus growth in banking loans. Such a prolonged gap has not been seen for more than 15 years and is particularly puzzling as every rupee of additional credit adds to money in the system, thus boosting deposit growth as well.

All the money that we see in the economy is either injected by the Reserve Bank of India (RBI) or created by banks. While the commonly understood role of banks as taking deposits from savers and then lending to borrowers is correct, it gives a mistaken view of the sequencing of deposits and loans. The moment a bank gives a loan to a borrower, the latter gets new deposits in her account, and money in the economy goes up. This is how total money, also called broad money, in the economy becomes more than five times the amount of money injected by the RBI, which is referred to