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Chart: Credit Growth Increases to 18%, Raising Rates Correct Option

Why are people cursing Rajan for raising rates? Credit growth is back to 18%+ as of September 6, and credit growth of that rate means one of two things:

  • Banks are evergreening loans and thus they lend out the principal+past interest for new loans.
  • The economy is improving.

Bank Credit Growth in India

In both cases, raising rates is the right option. Higher rates will curb evergreening by making it more expensive. An improving economy with high inflation needs corrective action for inflation because the momentum will cut a little bit of growth but control inflation better.

The story that’s out there, and the story in the data are two different things sometimes.