What is Credit Impulse?

The concept of credit impulse was first introduced by Deutsche Bank economist Michael Biggs, in November 2008. The concept emphasizes that spending is a flow and as such it should be compared with net new lending, a flow, rather than credit outstanding, which is a stock. Credit impulse is measured as the change in new credit issued as a percentage of the gross domestic product (GDP).

The studies, analysing credit flow data since 2008 covering several countries, have shown that investment growth is very closely correlated with credit impulse. Studies also show that credit impulse, in comparison with other credit variables, is better able to predict recoveries from a recession.

The below figure depicts the rate of credit impulse and investment in India post liberalization. The annual variation in gross bank credit outstanding has been used as a proxy for new lending. The figure 1 shows that both these variables have been moving in tandem, sharing similar troughs and peaks. The sharp increases in the credit impulse rate in the post-reform phase of the early 1990s, the peak economic growth phase of 2003-04 to 2007-08 and the credit boom of 2009-10 have been matched by high rates of investment.

Credit impulse has shown a consistent rise since March 2015 and this is also reflected in the real investment growth rate. Given that there is a strong correlation between credit impulse and investment growth, the rise in credit impulse may help push the growth of real investment in the near future, though this may not be a conclusive indicator as several other factors also affect investment.