The central bank must mobilise deposits to fund the economy, as a result of the central bank's money, said the RBI governor on Friday.
He said that the gap between credit and deposit growth is widening. There are concerns that the sub 9 per cent growth in deposit may pose funding challenges for lenders as they enter the festival season, when there is high credit demand.
According to Reserve Bank of India RBI data, credit growth in the system was 14 per cent during the fortnight ending July 15. The bank will pass on the rate hike on the deposit rates if the deposit growth gap is widening in the same period, as a result of just 8.4 per cent of deposit growth. The trend has started. In the past few weeks, a number of people have increased their deposit rates and this trend will continue, said Das in Mumbai after a meeting of the monetary policy committee that hiked the repo rate by 50 basis points.
If there is a credit off-take, the can sustain and support that offtake only if they have higher deposits. They cannot rely on central bank money on a permanent basis to support them. They have to mobilize their own resources and their own funds. He said that the banks will raise their deposit rates and they will try to mobilise more deposits for supporting the credit off-take.
Michael Patra, deputy governor at RBI, said there is very aggressive deposit mobilisation starting with bulk deposits. In June-July, we expect deposit mobilization to catch up with credit very quickly. System liquidity is in surplus mode, with average daily absorption under the LAF at Rs 3.8 trillion crore. Banks may have to chase deposits aggressively as the system erodes to support high credit demand.
Since May, the repo rate has been increased by 140 basis points. The cumulative rate is 5.40 per cent, which is 25 basis points higher than the pre-pandemic level. Banks have raised lending rates but their deposit rates have not kept pace.
As there is a correction in interest rates, deposit rates albeit with a bit of a lag will also find a new level, real interest rates that have been negative will be corrected and money flowing to channels outside banks will start coming back in, said Sanjiv Chadha, managing director and chief executive officer of Bank of Baroda, in an earnings call last week.
The weighted average lending rate on outstanding and fresh rupee loans has gone up by 19 and 31 basis points from March 2022, according to SBI Research. The average domestic term deposit rate on outstanding deposits has gone up 10 basis points the same time. As per the July bulletin of the RBI, the credit to deposit ratio has gone from 77.2 per cent to 246.8 per cent in end-March to 246.8 per cent as of June 17, 2022.
The banks have had an upward adjustment in the benchmark lending rates because of the rate hikes. Term deposit rates are increasing, which should bode well for the availability of funds with the banks in the context of continued buoyancy in credit demand, Governor Das said.