For the whole of last year, economy watchers fretted over sluggish credit offtake, citing this as evidence of the lack of animal spirits among Indian businesses. But just as green shoots have begun to spring up in the credit offtake numbers, there’s a new metric to worry about — deposit inflows. Latest data from RBI (end-March 2016) show aggregate deposit growth for banks at 9.9 per cent year-on-year. This is the lowest level of deposit growth seen in the economy since the 1960s. There’s no doubt a base effect at work here, as bank deposit flows today are at many times the level in the sixties. Nevertheless, dwindling deposit accretions are worrisome on three counts. One, if deposit inflows were to dry up just as credit offtake is picking up, banks, which are already liquidity-constrained, may find it hard to step up their lending to stimulate the economy. Credit-deposit ratios are already tightening with deposit growth (9.9 per cent) lagging credit growth (11.3 per cent). Two, it is unusual for deposit accretions to slow down amid moderating inflation. With consumer price inflation now at 5.2 per cent, we are in the midst of a rare phase where the real returns on bank deposits are positive (1-year deposits offer 7-8 per cent). Three, while it would be easy to attribute this slowdown in deposit inflows to low income growth, the sharp 15 per cent jump in ‘currency with the public’ that is, liquid cash sloshing around in the economy, belies this.
A partial explanation for lower deposit flows could be that retail savers have been shopping for financial instruments that offer better post-tax returns, as banks pruned their deposit rates by 100 basis points or so in the last one year. There’s only anecdotal evidence to support this. Small savings schemes have raked in net flows of ₹49,500 crore in the first eight months of 2015-16. But this is a relatively small proportion of annual bank deposit flows of ₹8-9 lakh crore. Mutual funds have attracted net flows of over ₹2 lakh crore, but the number isn’t much changed from last year. Given that these statistics don’t entirely explain the lower accretion to banks, the conclusion is that both households and businesses have taken to stockpiling cash, even if it means a sacrifice on returns.
This is clearly an unhealthy sign. It could signal that all the adverse news flow around banks and bad loans is beginning to take a toll on depositor confidence. In this case, the Centre and the RBI need to urgently reach out to the lay public with more confidence-building measures on behalf of banks. Or, despite all the statistical evidence, the Indian public is taking the official inflation numbers with a pinch of salt. In either case, it is clear that it is premature for policymakers to take for granted the mild uptick in financial savings witnessed in the past year. This is another factor for the RBI to ponder, along with the other variables, as it weighs further easing in its upcoming policy review.