Bank deposit growth slowest in 54 years amid low interest rates, surge in equity markets

Outstanding deposits stood at Rs 114.75 lakh crore as on March 30, 2018, compared to Rs 107.58 lakh crore a year earlier, translating into a year-on-year growth of 6.7 per cent, according to provisional figures from the Reserve Bank of India. This marks the slowest pace of growth in aggregate deposits of scheduled commercial banks in a fiscal year. Outstanding deposits saw an incremental growth of Rs 7, 17,334 crore between March 2017 & March 2018.

"The low deposit growth figure for FY18 can be explained by two key factors.  Firstly, FY17 saw a sharp rise in bank deposits vis-a-vis FY16 in the wake of demonetisation and hence the base for FY18 became much higher. Secondly, low interest rates offered by bank deposits and surge in equity markets saw people shifting away from FDs to equity mutual funds which witnessed record inflows in FY18.  Debt mutual funds also attracted significant inflows in FY18 though not as high as in FY17.  These factors collectively explain the subdued bank deposit growth figure for FY18," says Mitul Budhbhatti, Associate Director, CARE Ratings.

The surge in low cost current account and savings account (CASA) deposits into the banking system post demonetisation, coupled with the aggressive reduction in term deposit rates, aided the pass through of policy rate cuts to lending rates of commercial banks. The speed of transmission gathered momentum from November 2016, with lending rates falling faster than term deposit rates.

Capturing a month-on-month (m-o-m) change reveals some engaging details. Deposits in March grew nearly 4 per cent compared to February 2018, the second highest growth in 60 months. The highest m-o-m growth of 5.6 per cent was witnessed in November 2016 when the government announced the currency ban.  Since December 2017 and January 2018, respectively, deposit and lending rates have begun to inch up in line with interest rates in other financial market segments.

According to the latest RBI bulletin: "With the transition of system-level liquidity from surplus towards neutrality, banks have started raising their interest rates in a sequence beginning with bulk term deposit rates, retail term deposit rates and on to marginal cost of funds based lending rate system." The weighted average domestic term deposit rates on outstanding rupee term deposits have risen by 10 basis points during November'17 - February'18.

"Given that we might be looking at some upward pressure on interest rates, banks may start hiking FD rates which could potentially increase their attractiveness. In fact, some of the banks have already increased FD rates of late. On the other hand, the equity markets may not produce the kind of returns that were witnessed in 2017 and debt mutual funds will end up losing in a rising interest rate scenario. Hence, we may see bank deposits grow at a higher rate in FY19 vis-a-vis FY18," adds Budhbhatti.