'Slow deposit growth a threat to lending rate cuts'

Slow growth in deposits poses a threat to lending rate cut plans of banks, according to Indranil Sen Gupta, chief economist of Bank of America Merrill Lynch in India. “It is for this reason we expect the Reserve Bank of India (RBI) to OMO (open market operation) an additional Rs 32,000 crore by March 2013 atop Rs 1,28,900 crore fiscal year-to-date to improve liquidity,” Sen Gupta wrote in his note to clients on Thursday.

Bank deposits fell for the fortnight ended December 14, 2012. On a year-on-year basis, deposits grew 13.3 per cent to Rs 64.3 lakh crore, but fell 0.1 per cent sequentially, RBI data showed. The central bank has projected deposit growth of 15 per cent for the current financial year. But many bankers have expressed doubts on achieving the target.

Sengupta said the slow pace of growth in bank deposits was on account of the RBI’s intervention in foreign exchange market that sucked out liquidity from the system. “Why did bank deposits fall in December quarter? clients ask. Due to a simple statistical quirk, that will likely reverse next fortnight. Some of the other explanations doing the rounds — negative real rates, excessive consumption or gold demand — are, in our opinion, completely off the mark. That said, we continue to highlight that systemically slow deposit growth poses a threat to lending rate cuts given higher-than-expected loan demand,” said Sen Gupta.

He, however, was hopeful deposit growth will accelerate in coming months and be 15-16 per cent by March 2013.