India’s Credit Spike: A December Distortion, Not an Economic Signal

India ended 2025 with a banking statistic that looked too good to be true. It probably was. In just a fortnight ending December 31, bank credit expanded by a staggering ₹6.3 trillion, catapulting annual credit growth to 14.5% from 11.5% a mere two weeks earlier. For an economy grappling with slowing momentum, this sudden burst invited celebration. It should instead invite scepticism.

Such explosive credit growth is not a marker of economic vitality when it arrives unannounced, unsupported, and out of sync with underlying demand. The December surge stands out less as a turning point and more as a statistical distortion—rare, episodic, and unlikely to endure.

Historical Rarity
A 3.2% jump in bank credit within a single fortnight is almost unheard of. Over the past twenty years, it has occurred only 11 times, barely 1.5% of all observations. Most of those episodes belonged to a different India, one marked by aggressive private capital expenditure before 2012, when infrastructure and industrial projects soaked up bank funding. In the post-demonetisation era, such spikes have appeared just three times, two of them during recoveries from extreme shocks: demonetisation itself and the pandemic.

December 2025 fits neither template. Credit demand remains tepid, private capex subdued, and growth visibly moderating. A brief GST-led consumption bump in October faded quickly, with November data showing broad-based slowing. Industrial production lacks momentum, corporate revenue growth for the December quarter is expected at a modest 5–6%, and manufacturing project announcements slumped sharply to ₹4.2 trillion, a 30% quarter-on-quarter decline. None of this squares with a credit boom of this magnitude.

So what explains it?

Several candidates emerge. Policy-driven reflation has nudged borrowers towards banks as deposit growth lags credit expansion, pushing the credit–deposit ratio to a stretched 81.7%. Liquidity tightness has lifted money market rates and bond spreads, making bank loans relatively attractive. Meanwhile, the rupee’s sharp depreciation—breaching 90 to the dollar—has raised the cost of servicing external borrowings, incentivising a shift towards domestic credit.

Quarter-end window dressing is another possibility. Banks are no strangers to balance-sheet cosmetics, though December rarely rivals March for such behaviour. Historical comparisons weaken this argument: even at peak fiscal year-end pressures, the final fortnight of 2024-25 saw credit rise by just 0.9%.

The most convincing explanation lies elsewhere: the clustering of project loan disbursements. Faced with tighter provisioning norms under the RBI’s new Project Finance Directions, banks appear to have frontloaded sanctioned loans to avoid higher future costs. By accelerating disbursements before stricter rules bite, margins are protected and provisioning pain deferred.

Evidence points to this being concentrated among large lenders such as State Bank of India, ICICI Bank and Canara Bank, together accounting for over a third of system credit and holding sizeable project loan books. Strip out this frontloading, and underlying credit growth likely settles closer to 12% than the headline-grabbing 14.5%.

This frontloading phenomenon carries ripple effects. By pulling forward future lending, it could dampen growth in the fourth quarter compared to the prior year, with potential spillover into the next fiscal. Banking liquidity tightness, evident in spiking rates and spreads, may ease by June next year as the anomaly unwinds. However, countervailing pressures loom: inflation is ticking upward, and the rupee's weakness persists, likely constraining RBI's scope for further rate cuts.

The consequences are not trivial. Pulling forward future lending risks leaving a vacuum in subsequent quarters, potentially softening credit growth in the fourth quarter of the current fiscal and spilling into the next year. Hasty front loading of project lending to gain from opportunistic regulatory arbitrage runs the risk of undermining underwriting quality, inducing chances of future bad loans. Liquidity pressures may ease as the anomaly unwinds, but inflation risks and a weak rupee constrain the RBI’s room for manoeuvre. Deposit growth continues to trail credit, forcing banks and NBFCs to rely on costlier funding, squeezing margins despite headline loan growth.

More broadly, the episode is a reminder of how regulatory anticipation can warp short-term data. The October GST-led bump, like the December credit surge, proved fleeting. Neither altered the underlying reality of cautious consumers, hesitant corporates, and uneven investment revival.

Credit growth that is pulled forward is not growth created. Sustainable expansion will come only from a genuine revival in private capex and productivity-enhancing reforms—not from accounting accelerations and regulatory arbitrage. December’s surge may flatter the numbers, but it tells us far more about balance sheets than about the economy’s true direction.