Bank Deposits in India: Underlying Dynamics

Harendra Behera and Dirghau K. Raut and Arti Sinha of RBI in the monthly bulletin for May-2019 research analyse the recent trends in bank deposits:

Bank deposits remain an important part of the financial savings of households and key to the financing of bank lending.

Deposit growth is picking up in recent months in a cyclical upturn since December 2018, which is overwhelming a trend lowdown that has been underway since October 2009. The latter warrants policy consideration since deposit mobilisation is fundamental to India’s bankbased system of financial intermediation.

Empirical evidence puts forward several interesting facts about the behaviour of bank deposits.

First, it underscores the income as its most important determinant, both in the short-and in the long-run.

Second, interest rate matters for deposit mobilisation but only at the margin.

Third, financial inclusion has a boosting effect on deposit mobilisation over the long-run suggesting expansion of bank branches in unbanked areas.

Fourth, substitution effects associated with Sensex returns for deposit growth are limited to the short-run, warranting a careful appraisal of regulatory reforms and tax arbitrage, even as efforts need to be intensified to make both more market determined.

Finally, similar to Sensex return, small savings substitute bank deposits in the short-run but supplement deposits in the long-run, reflecting that limits on income tax exemption eventually evens out substitution effects and allow income to be the key determinant of both in the long-run.

In the final analysis, therefore, accelerating the rate of growth of the economy and disposable incomes holds the key to higher deposit mobilisation by the banking system.

Hmm..

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