Household savings do not create deposits, only the RBI can
bank deposits has been a matter of concern, particularly as growth in private credit has outpaced deposits for the last two years. This has largely been attributed to a decline in household savings, a shift to physical savings, or even a shift to alternate financial savings like mutual funds.
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But contrary to intuitive belief, household savings do not create deposits. This seems incompatible with our lived observations, as we observe that people make deposits only from savings. Statistics show that 60% of Indian bank deposits are from households that propagate a similar narrative. So, how did an individual get this money?
This is income received from another individual or firm. The salary a person gets from her employer is the deposit in the employer's account that shifts to her's. She retains part of this deposit in her account (savings) and spends the rest-that is, shifts to bank deposits of a seller of goods/services.
So, neither spending nor saving impacts the total deposits. It just determines in whose account the deposits reside. Money moving from one individual to another within the economy is called a transfer. Similarly, if rather than a financial saving, she chooses to invest in a physical asset (say, a house) or an equity share, the amount in her bank would just be transferred to the seller's account, and aggregate deposits in the system are unchanged. China, for instance, has seen deposit growth in its
