A recent easing of liquidity conditions and higher base money growth will likely push up deposit growth over time even as there is a noticeable rise in corporate deposits and a fall in household deposits, according to HSBC.

The foreign bank, in a report, noted that with the heatwave ending, “inflation is converging towards target as per our forecasts, unsecured lending has cooled off, the dollar index has weakened in recent weeks, the RBI’s FX reserves have risen, and the government has ramped up spending”.

“Some of these factors have arguably made the RBI more comfortable with faster M0 (base money: the total amount of cash and cash deposits in an economy) growth, while others have already raised M0 growth and eased banking sector liquidity in recent weeks,” said Pranjul Bhandari Chief Economist, India and Indonesia, HSBC, and Aayushi Chaudhary Economist, India, Indonesia & Sri Lanka, HSBC Securities and Capital Markets (India), in a report.

The HSBC economists opined that if this sticks, deposit growth could rise, resolving half of the RBI’s worry.

Looming concern

They noted that the Reserve Bank of India (RBI) has articulated its worries about weak deposit growth, the rising credit-to-deposit ratio, and compositional shifts (too much unsecured lending, too few sticky deposits) that could hurt financial stability.

With base money having risen recently and likely to rise further, as the RBI moves from tight to neutral/loose monetary policy, deposit growth could get a shot in its arm, the report said.

The economists observed that it may be harder to resolve the composition shift issue.

At first glance, if deposit growth rises, the ratio must fall. However, looking deeper, higher deposit growth could also make funds available for higher credit growth (assuming no fall in the money multiplier).

Compositional shifts

“Alas, this is where no quick solution seems visible (for changing the composition of credit and deposit). The RBI has been concerned about compositional shifts. Too much unsecured lending on the credit side. And too few sticky deposits and too much callable bulk deposits on the deposit side,” Bhandari and Chaudhary said.

Some short-term interventions have helped and could continue to help. For instance, higher risk weights since November 2023 have lowered the pace of unsecured loan growth already. However, these would be partial fixes.

Dip in household savings

Corporate saving is above pre-pandemic levels (at 11 per cent of gross national disposable income/GNDI in FY24 against 10.3 per cent in FY23), driven by strong profitability in certain sectors, while net household saving is lower than before (at 18.1 per cent of GNDI from 20 per cent).

The HSBC economists said this is partly reflective of a two-speed economy, where some sectors are growing well, but all the gains are not flowing down to mass incomes.

“In short, to improve the composition of credit (more capex loans, less personal loans) and deposit (more retail-led CASA deposits, less corporate bulk deposits), the economy needs to support income growth across the pyramid (low-, mid- and high-tech sectors),” said Bhandari and Chaudhary .

They observed that improving the composition of credit and deposit will require careful and timely reforms.

“One of them being making the most of global trends whereby many companies are trying to rejig production supply chains. Actively pursuing FDI in low- and mid-tech sectors like textiles, food processing, and toys, which tend to be more labour intensive, could raise both investment, as well as wages and incomes,” the report said.

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