The war for deposits could be prolonged, triggering a paradox of higher deposit rates even as rate cuts start to occur, cautioned the State Bank of India’s economic research team.

This is because the returns on bank deposits are taxable and their treatment (bank deposits are taxed on an accrual basis compared to competing asset classes being taxed at redemption) is completely non-uniform compared to other asset classes.

“This could significantly impede (monetary) policy transmission. The RBI needs to innovate on liquidity management. It is time now to make the CRR (cash reserve ratio) a countercyclical policy tool,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

He observed that asymmetric transmission (of policy rate changes) takes centre-stage as borrowing is moving down for India Inc, with the WALR (weighted average lending rate) declining, though weighted average deposit rates are inching up.

Ghosh emphasised that the downward rigidity in deposit rates opens up a pandora’s box in the RBI rate easing cycle when it occurs.

Given the greater instability of CASA (current account, savings account) deposits with the advent of walletisation, apps, IMB (internet & mobile banking), and UPI sweeping the payment landscape, SBI’s economic research team observed that time deposits have also been showing a shift to shorter duration (up to 3 years). Despite banks raising deposit rates handsomely, the returns are not commensurate with the yield on other risky asset classes.

In the latest monthly bulletin, RBI officials observed that the share of low-cost CASA deposits has largely bottomed out in the 39-40 per cent range (of domestic deposits), marking a steady decline from about 44 per cent in 2021-22.

“This is likely to squeeze banks’ net margins going forward and prompt the repricing of deposit books. In fact, banks have been impelled to increase the mobilisation of funds through certificates of deposits (CDs) in June ahead of the quarter-end,” the officials said.

SBI’s Ghosh cautioned that, given the unfavourable tax treatment and application, this could be detrimental to banks’ efforts to pass on lower lending rates uniformly to all borrowing cohorts going forward, when the Central Bank induces rate cuts.

“The deposit rates may remain....in higher echelons, posing a challenge to banks’ ability to manage their ALM (asset-liability management) prudently and maintain optimal profitability, especially given the significant capital requirements to fund economic growth and the climate-related transitions. These transitions require substantial milestone-based investments, some of which may need to be frontloaded to counter carbon taxation,” he said.

As of July 12, 2024, all scheduled banks’ deposit growth (at 11 per cent year-on-year) lagged credit growth (at about 14 per cent year-on-year), according to RBI data.

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