Policy easing failed to lower deposit rates: RBI

The Reserve Bank of India (RBI) today admitted that its efforts to ensure transmission of monetary policy action had been ineffective to a certain extent, as tight liquidity conditions had prevented banks from lowering their deposit rates.

“Although there was monetary policy easing over 2012-13, some banks raised their deposit rates from mid-December 2012 in certain maturity buckets, in view of tight liquidity conditions,” RBI said in its macro-economic and monetary developments report for 2012-13.

The central bank’s decision to cut its policy rate by 50 basis points (bps) in the first half of 2012-13 had led to a 13 bps decline in deposit rates. But, in the second half of the financial year, deposit rates rose, despite RBI reducing the repo rate by another 50 bps. Typically, banks reduce their deposit rates ahead of lending rates. Deposit rate cuts lower banks’ cost of funds and allow them to lend money at lower rates.

The aggregated deposit growth during 2012-13 was also slow at 13.5 per cent, mainly on account of deceleration in time deposit growth. Time deposit growth in 2012-13 was 14.7 per cent, compared with 15.7 per cent in the preceding year. “One major reason was the near-zero real interest rate on term deposits, mainly due to high inflation,” RBI said. But, the banking regulator was hopeful the ebb in inflation and the consequent increase in the real interest rate would boost banks’ deposit growth.

The slowing in India’s economic growth also adversely affected credit demand. The deterioration in asset quality also impeded the supply of domestic credit.

“Notwithstanding the large injection of liquidity by the Reserve Bank, adverse sentiments emanating from global and domestic developments somewhat dampened credit expansion and scheduled commercial banks’ non-food credit growth remained below the Reserve Bank’s indicative trajectory,” RBI noted. Still, credit growth remained above deposit growth for most of 2012-13, it said.