People spending more and increasing outward remittances could be two reasons for the sluggish growth in deposits of banks, which stood at a meagre rate of 9.9 per cent in FY 2016, according to report by State Bank of India’s economic research department.

The ‘Ecowrap’ report said that contrary to popular perception, high real interest rate is actually leading to lower deposit growth rate.

Ecowrap assessed, “This is paradoxical, but the divergence between the two has been widespread and in opposite directions since September 2014. Despite a relatively high real interest rate, deposit growth of banks have not picked up.”

The deposit growth of 9.9 per cent in FY 2016 (till March 18) has hit a 53-year low. This has resulted in acute shortage of funds with banks for lending purposes.

According to RBI data, all scheduled commercial banks in India had deposits aggregating ₹93,78,650 crore as on March 18, against ₹85,33,285 crore as on March 20.

The bank’s economic research team believes that given high real deposit rates are more the by-product of lower inflation, such negative causation may be resulting in people spending more/leakage through currency.

LRS Scheme Another possible reason for decline in deposits, according to Ecowrap, could be increasing outward remittances, as revealed by the Liberalised Remittance Scheme (LRS) data.

Outward remittance under LRS has seen a huge jump as soon as the limits were revised. From $106 million in May 2015, the remittances reached $449 million in February 2016, a jump of 324 per cent.

LRS is a mechanism available for resident individuals to remit money for any permitted current or capital account transaction, or a combination of both, through a bank branch authorised to deal in foreign exchange.

Since it was introduced in 2004, the ceiling has been revised according to the prevailing economic scenario. At present, the limit stands at $250,000 per financial year. This limit was doubled in May 2015. SBI’s research team observed that people spending more and increasing outward remittances portend towards the increasing propensity towards foreign consumption, rather than towards saving.

The negative correlation of 0.39 between growth rate in bank deposits and growth rate of outward remittance under LRS also seems to correlate this, it added. The team believes the argument of mutual fund inflows acting as a drag on bank deposits is a false negative, as such cheques are actually written on banks in India and unlike the US, mutual funds in India cannot write cheques on their own.

Holding higher cash To a specific question on why the public holds more cash, RBI Governor Raghuram Rajan had recently said, “Around election time, cash with the public does increase; you can guess why. “And you see that not just in the States going to polls but also the neighbouring States. So there is something there, we need to understand it better, but it is about ₹50,000-60,000 crore more than we anticipated at this time of year.”

CARE Ratings, in a report, said bank deposits are unlikely to see significant upward movement, with the system moving to a lower interest rate regime.

“This has been one of the effects of lower interest rates where households have been less willing to put money in bank deposits – this could be a temporary phenomenon but needs to be monitored closely.

“Liquidity shortfalls in the banking system, on account of lower deposit growth, are likely to prevail. It is for this reason that the RBI has assured liquidity through the OMOs (open market operations), which will maintain liquidity in a neutral state,” the agency said.

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