GST cuts to boost demand but won’t trigger credit growth as banks remain cautious over tariffs

Credit growth

The reduction in goods and services tax (GST) is anticipated to boost demand and spur lending, however, banking analysts have told Moneycontrol that credit growth may remain stable and is unlikely to accelerate, as lenders are cautious owing to tariff-related uncertainties.

The Centre has cut the goods and services tax on small cars, televisions, air conditioners, textiles and a range of household goods from September 22 in a major overhaul aimed at spurring consumption ahead of the festive season, at a time when Trump's tariffs are threatening India’s exports to US.

The GST Council’s nod to the two-tier rate structure of 5 percent and 18 percent arrives just weeks before the onset of the festive period, when discretionary purchases of vehicles, consumer durables and home goods typically accelerate.

“The GST rationalisation is expected to serve as a stabilising measure to mitigate the impact of evolving geopolitical dynamics on credit growth,” said Sachin Sachdeva, Vice President & Sector Head – Financial Sector Ratings, ICRA.

“It is likely to stimulate private capital expenditure and retail consumption, uplifting consumer sentiment as the festive season approaches,” Sachdeva added.

ICRA has maintained its FY26 banking credit growth forecast of 10.4-11.3 percent on year, and while being upbeat on demand, Sachdeva sees “persistent uncertainties around tariffs and emerging concerns over asset quality are likely to keep the sector cautious.”

The systemic credit growth of Indian banking system stood at 10.03 percent on-year in the fortnight ended August 22, signalling that banks are ramping up credit ahead of the festival season, amid rate cuts and expected consumption boost following GST regime overhaul.

This is the third consecutive fortnight that credit growth has stayed in double digits. According to Reserve Bank of India (RBI) data, credit growth was at 10.22 percent in the fortnight ended August 8 and 10.03 percent as on July 25.

On August 26, Moneycontrol have reported that Indian banks are hopeful of a revival in credit demand in the second half of the current fiscal (H2FY26), with bankers projecting growth in the range of 10–12 percent, supported largely by the upcoming festive season starting September. However, lenders caution that lingering US tariff uncertainties and trade tensions could pose challenges to sustaining momentum.

Historically, credit growth tends to accelerate during India’s festive season, when households step up purchases of vehicles, consumer electronics, home appliances, and other big-ticket items. Banks too line up aggressive loan campaigns at discounted interest rates and with special festive schemes, spurring short-term demand.

Brokerages expect the reduction in GST may help the retail loan segments such as auto, housing and consumer durables.

“GST 2.0 rate cuts are likely to give a strong push to credit growth, especially in retail lending,” said Vikrant Shah, Research Head at Choice Institutional Equities. “Banks and NBFCs, particularly vehicle financiers, are well-placed to benefit through higher loan disbursements, stronger balance sheets and steady earnings growth.”

Investment bank DAM Capital Advisors said the GST on banking services remains unchanged at 18 percent but expects financing volumes to rise as product prices fall.

“We don’t expect any direct AUM or loan growth impact from price reductions since loan-to-value ratios are calculated prior to GST and registration costs,” the brokerage said. “However, used vehicle and tractor prices may adjust downward as new vehicles become cheaper.”