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The liquidity position of banks is expected to improve considerably as the public will be depositing ₹500 and ₹1,000 bank notes with them following the government’s announcement late on Tuesday that they will no longer be legal tender.
This could also have the effect of bringing down deposit and lending rates further without the RBI having to cut its signal repo rate, say experts.
“Banks’ deposit base will receive a fillip of 0.5-1.4 per cent of GDP. In turn, financing savings can be expected to rise by close to this proportion, due to switch from savings in unproductive physical assets to financial assets,” said Rana Kapoor, MD and CEO, YES Bank
A rise in deposit base will allow banks to lower the blended cost of funds. “We expect banks to reduce deposit rates by about 125 bps over the next six months. The new regime of MCLR will immediately take into account the lower cost and will thereby lead to a decline in lending rates, which will boost economic activity in the medium term,” Kapoor said. India Ratings, in a note, said surge in deposits will create more demand for government bonds and other high-rated bonds in a situation of tepid demand for credit, leading to lower bond yields, especially in the shorter end of the curve.
Madan Sabnavis, Chief Economist, CARE Ratings, said though the liquidity position of banks will improve, households have held on to these funds for emergency purposes, and there would be withdrawals at the second stage, he added.
Karthik Srinivasan, Senior Vice-President, ICRA, observed: “Deposit growth could rise significantly in the next two months, from the low double-digit level at present. This would also aid transmission of past repo rate cuts to reduction in the MCLR (marginal cost of funds-based lending rate).”
Nevertheless, Srinivasan does not expect a major pick-up in bank credit growth, given the sharp and immediate correction in bond yields that has already taken place.
India Ratings said it expects a large amount of cash in circulation to be brought within the purview of the formal banking system by way of deposits.
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