Why are banking deposits declining? A case of correlation does not imply causation..

Despite repeated efforts, statistics is something this blogger has failed to figure (the efforts are still on though). But there are somethings in statistics one should not just broadly know but more importantly be weary. So whenever you hear/read the word correlation and then see people using it to prove causation, you should be on a red alert. After all just because two things are correlated, it does not mean one causes the other. Correlation does not imply causation.

This article is just an example of such a mistake. It correlates falling deposits in India to two variables – real interest rates and outward remittances. It finds strong correlation for both and says they could be factors for falling deposit growth…

Despite a relatively high real interest rate, deposit rates of banks have not picked up. Deposits of all scheduled commercial banks (ASCB) have remained sluggish with a meagre growth of 9.9% in FY16, till 18 March 2016, which is at a 53-year low. However, at the same time outward remittances under the liberalised remittance scheme (LRS) jumped 324% in February 2016, says SBI in its Ecowrap report.
“First, contrary to popular perception, high real interest rate is actually leading to lower deposit growth rate. This is paradoxical, but the divergence between the two has been widespread and in opposite direction since September 2014. The correlation between the two is –0.64. We believe that given high real deposit rates are more the by-product of lower inflation, such negative causation may be resulting in people to spend more or leakage through currency,” the report says.
Second possible reason could be,” it said, “increasing outward remittances as revealed by LRS data. Since it was introduced in 2004, the ceiling for the scheme has been revised in May 2015. From $106 million in May 2015, the remittances reached $449 million in February 2016, a jump of 324%. The correlation between the two is –0.39.”
One could just list the two as probable factors for decline and not get into correlation…

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: