The sustainability of the revival in investment activity going ahead is contingent on lower and stable inflation, stronger growth in global output and trade, improvement in financial conditions, timely project completion by the corporates and a favourable commodity price outlook, according to RBI’s FY24 annual report.

RBI noted that as of March 2023, the non-food credit growth (year-on-year) was robust at 15.4 per cent, same as that of the nominal GDP for 2022-23. The broad-based expansion in bank credit has been facilitated by healthier balance sheets of banks, it added.

“Bank credit plays an important role in financing the investments of corporates in India. A sustained increase in credit may have lead information about investment demand pick-up, while an occasional rise may indicate demand for working capital which could be for utilisation of current capacity,” RBI said.

The central bank said despite the increase in commodity prices and rise in interest rates, corporate investments have picked up in the recent period.

Borrowings and inflation

To assess as to whether the rise in bank credit could revive the investment cycle, RBI researchers examined the relationship between borrowings and fixed investments of listed non-financial firms by a dynamic panel model for the period 2011- 12 to 2020-21.

Results show that a one percentage point higher growth in bank borrowings increases nominal net fixed assets (NFA) by around 0.17 percentage points.

“Higher inflation raises operating costs, which in turn, may reduce fixed investment. The sensitivity of fixed investment to bank borrowings falls during periods of higher inflation. This highlights the crucial role of low and stable inflation to the investment outlook,” RBI said.

To reconfirm the nature of revival in investment activity, investment cycles were estimated by the researchers by employing an asymmetric band-pass filter on quarterly seasonally adjusted investment rate and real gross fixed capital formation data.

Cycles extracted from both series corroborate cyclical revival in investment from the slump encountered during the first wave of the pandemic.