A finance professor at the Indian School of Business has put a sharp question at the centre of India’s economic debate: if bank lending is growing at 19.1 per cent while nominal GDP is growing at only around 10 to 11 per cent, what is all that extra credit financing? In a post on October 31, Prasanna Tantri warned that the gap, not the rupee’s exchange rate, is India’s biggest macroeconomic problem, and urged policymakers to cool credit growth before inflation expectations become entrenched.
Tantri, an ISB finance professor, calls credit growth relative to nominal GDP the most important indicator policymakers should track.
What the RBI data shows
The figure comes from RBI sectoral credit data for September 2026, released on October 30. Non-food credit grew 19.1 per cent year on year, up from 11.2 per cent a year earlier.
- Services: up 28.3 per cent to Rs 64.9 lakh crore. Lending to non-bank lenders jumped 41.8 per cent to Rs 22.5 lakh crore.
- Industry: up 19.5 per cent to Rs 49.77 lakh crore, from 7.7 per cent a year earlier.
- Agriculture: up 19.5 per cent to Rs 28.19 lakh crore, from 8.9 per cent a year earlier.
- Personal loans: up 17.3 per cent, from 11.5 per cent a year earlier.
- Outstanding non-food credit: Rs 229 lakh crore at the end of September.
Why the gap matters
Tantri’s logic is straightforward. When banks lend, they create deposits, and deposits expand the money supply. If lending grows nearly twice as fast as nominal output, the extra money has to go somewhere. His question is whether it is building productive capacity, factories and businesses that can supply more goods, or simply financing demand that supply cannot meet. In the second case, he argues, the result over time is higher prices.
That is why he flips the usual worry on its head. Much recent debate has focused on the rupee and capital outflows. Tantri says the exchange rate is not the biggest problem. The risk, in his phrase, is that the inflation genie escapes the bottle and expectations become entrenched. Once people start expecting higher prices, bringing inflation back down requires a much more painful adjustment.
This is his assessment, not an RBI forecast. The RBI has pointed to external pressures such as crude oil; Tantri argues the central problem is internal monetary expansion.
What he wants the RBI to do
Tantri’s prescription is staged. First, bring credit growth down to 13 to 14 per cent. Then, align it more closely with nominal GDP growth. He does not call for a sudden credit freeze. The point is to restrain the expansion while it is still possible to do so gradually. Waiting until inflation has clearly worsened, he says, would force a sharper response.
After the RBI raised the repo rate to 5.50 per cent on October 7, Tantri welcomed the move but called it 9 to 12 months late. His balance-sheet estimates are his own, not official RBI statements.
Where inflation and rates stand
Retail inflation rose to 5.54 per cent in September from 4.83 per cent in August, with food inflation at 7.74 per cent. The Finance Ministry noted about 64 per cent of CPI items still show inflation below 4 per cent. The RBI expects inflation to peak at 6 per cent in October to December before easing to 5.7 per cent next quarter.
On lending rates, the RBI’s October 30 update was mixed. The average rate on outstanding rupee loans was unchanged at 8.96 per cent in September, while the rate on fresh loans eased to 8.51 per cent from 8.61 per cent in August. New borrowers were still getting slightly cheaper loans even as overall credit surged.
What it could mean for borrowers and savers
If the RBI takes the warning seriously, rates could stay higher for longer. Its next policy meeting is in December, and several economists already expect another increase. That would keep loan rates from falling quickly, which matters for home, auto and personal loan borrowers.
For savers, Tantri argues India needs real rates above inflation to protect savings. His concern is that too much new credit finances consumption, raising household debt.
A December hike is not certain, and credit growth can reflect genuine demand. The test is simple: if credit stays near 19 per cent, the gap persists; if it cools towards 13 to 14 per cent, the pressure eases.
FAQs
What is the 19.1 per cent figure?
Non-food bank credit growth as of September 30, 2026, against 11.2 per cent a year earlier.
Why compare credit with nominal GDP?
Nominal GDP growth, around 10 to 11 per cent, measures output value. Faster credit growth means money expanding faster than output.
What does 13 to 14 per cent mean?
Tantri’s proposed first step, not an RBI target.
Will the RBI raise rates in December?
Not necessarily. Some economists expect a hike, but the RBI will weigh inflation and growth at its meeting.
The debate matters because it frames a choice every fast-growing economy faces: how much credit is fuel for growth, and how much is fuel for inflation. For now, credit is running well ahead of output. Whether that gap closes gently or forces a harder adjustment is what the next few months of RBI data will answer.
