The rate of change of new credit creation as a percentage of GDP — one of the most reliable leading indicators of economic activity, corporate earnings, and equity market returns.
“Credit is the lifeblood of the economic machine. When it flows freely, the machine runs fast. When it tightens, the machine slows — often before the statistics reveal it. Watch the rate of change in credit creation, not just its level. — Ray Dalio”
— Ray Dalio
Deeper Explanation
The credit impulse measures not the level or growth rate of credit but the acceleration or deceleration of new lending — the second derivative of credit. Economies experiencing positive credit impulse (banks lending more aggressively than in the prior period) tend to see improving economic activity 6–9 months later, rising corporate earnings, and equity multiple expansion. Economies experiencing negative credit impulse (new lending slowing from its prior pace, even if still growing in absolute terms) tend to see economic softening 6–9 months ahead of the data confirming it. In India, credit impulse is tracked through RBI published data on bank credit growth, specifically looking at the quarter-on-quarter change in the year-on-year growth rate. Credit impulse turned sharply negative in FY2019-20 as NBFC stress froze the shadow banking transmission mechanism, preceding both the economic slowdown and the March 2020 market correction. It recovered sharply in H2 FY2021, signalling the credit-fuelled recovery well before GDP data confirmed the expansion. The credit impulse works because credit creates demand — new loans are spent on goods, services, and assets. When the flow of new credit accelerates, spending accelerates proportionally.
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