A classic scramble for deposits has erupted among banks again

livemint.com:

₹50 trillion in December 2023. To put the number in context, the comparable figure in December 2013 was only ₹884,631 crore. Category-wise data from the Association of Mutual Funds in India points to another interesting trend: at end-September 2023, household investment (retail plus high net worth individuals) in equity mutual funds was three times the sum of wholesale investments (corporates and banks plus foreign portfolio investors).

The other reason has been the banking system’s lethargy in raising deposit rates, even after the Reserve Bank of India (RBI) increased benchmark rates. Banks are traditionally prompt in raising lending rates when RBI hikes rates but are sluggish in increasing deposit rates. The opposite holds true when RBI cuts rates: deposit rates drop faster than lending rates.

In short, it’s a lose-lose proposition for depositors. On the greener side of the fence, equity markets have been on fire over the past 12-18 months and this further induced depositors to divert their investible surpluses. A third probable reason could be the 2016 demonetization episode, which discouraged people from putting their money in banks (see 2017 data in chart).

A combination of these factors has led to some skews over the past two years. Aggregate deposit growth during calendar 2023 stood at 12.5%, an improvement over the previous year. But, somewhat counter-intuitively, bank credit grew faster, by 15.64%, during the same period.