The surprise rate hike by the RBI signalling a reversal of the interest rate cycle will weigh down on the banking system's credit growth, which was showing signs of revival with an 11 percent growth, a report said on Thursday. The tailwinds supporting a pick-up in credit growth will be in demand from the industry and services segments, even as growth in the agriculture segment remains stable and muted in the retail segment, India Ratings and Research said.

Over the medium term, inflationary pressures, supply chain disruptions and a weak consumption demand could upset the current revival in credit growth, it added. "The reversal of the interest rate cycle as signified by the 0.40 per cent increase in repo rate by the Reserve Bank of India would weigh down on the credit growth as borrowings become costlier," it said.

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The agency added that it has received feedback from the companies rated by it, which points to a delay in capital expenditure plans as they await more clarity on the macroeconomic front. It said that banking system credit growth offtake has shown a significant pick-up in the early part of FY23, with credit growth of 11.2 percent as of April 8, 2022, compared to 5.3 percent in the same period in 2021, it said, adding that this is the highest since July 2019.

The agency believes that while the second COVID wave had significantly impacted the credit outlook in 2021, the outlook reasonably normalised at the beginning of 2022. In a report published in February, the agency had estimated that the system-wide credit growth will stand at 10 percent for FY23. The number was not revised in the latest update.

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On Monday, it said the sectors which are likely to continue to perform well will include power, metals, cement, chemicals and textiles, while telecom, pharma, and commercial real estate will be under pressure.

In the near term, a continuing working capital demand from corporates, driven by high commodity prices and the beginning of a shift back to the banking system from the bond markets amid rising interest rates would keep the credit growth drivers in place, the agency noted.

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Retail loans continue to be the single-largest contributor to the incremental year-on-year growth, although the proportion declined to 42.7 percent in February 2022 from 57.7 percent in March 2021, it added.

The agency said half of the incremental retail loans since July 2021 are to the unsecured segment, which signifies lenders chasing wider profit margins. However, it was quick to add that they are doing so with tighter credit filters after their experience in the pandemic.