Impact of rupee depreciation on total bank credit

When ` depreciates with US$, the import would be costly. The importer would ask for payment through US$. So the importer would go for bank credit and tells payment has to be done in US$. The bank should have good foreign reserves for the payment. Otherwise, RBI would supply. But when more ` is required to pay one US$, Banks would find shortage of `. Because to have more US$ for payment to importer banks would have paid much more `. So, this would lead to credit crunch and liquidity position (run out of cash). Quantity of  ` would come down as more US$ or foreign reserve would be lying. It would affect the credit flow and impacts the credit availability for working capital and fixed investment requirements by the industry. Hence, banks hands are tied and industries won't have easy accessiblity to loan funds.

Thus, the  ` depreciation has been feeding into core inflation, delaying the adjustment of inflation to slower growth. And also, RBI's monetary policy stance on 'to maintain an interest rate environment to contain inflation and anchor inflation expectations'.