With deposit growth falling to four-and-half month low, expectations of liquidity support from the central bank in the form of reduction in cash reserve ratio and open market operations (OMOs) are building.
On an annualised basis, deposit growth has slowed down to 13.4% mid-November compared to 16.5% growth seen last year.
Indranil Sen Gupta, economist with Bank of America Merrill Lynch, said deposit growth has begun to flounder at 13% levels with the Reserve Bank of India (RBI) delaying primary liquidity.
“This is hardly sufficient to fund loan demand that is still running at relatively high 16% levels. On our part, we expect the RBI to cut cash reserve ratio (CRR) again,” said Sen Gupta in a note on Tuesday.
Banks have to keep 4.25% of their deposits – called CRR — with the RBI.
Sen Gupta argues that even hiking deposit rates may not help in driving up fund inflows but may push up the cost of deposits and prevent lending rates from easing. Also, policy rate cuts may not translate into lending rate cuts till bank liquidity improves.
On the other hand, bank credit grew at 16.9% in mid-November, lower than the 17.7% seen last year.
“Growth continues to be driven by large industries, trade services, non-banking finance companies and retail, whereas mid-corporates, SME and some service segments have seen a sharp decline,” said analysts with Religare Institutional Research in a separate note.
On Tuesday, the RBI injected Rs11,642.9 crore via OMO against a notified amount of Rs12,000 crore. More than half of the amount was injected via purchase of the 8.19% government security maturing in 2020.
More OMOs are expected in the rest of the financial year. “However, the central bank may resort to a cut in cash reserve ratio if the strain on liquidity persists longer,” agreed N S Venkatesh, head of treasury at IDBI Bank.