Deposit growth hits 6-yr high on Rs 2000 note withdrawal, higher FD rates

Bank deposits witnessed a healthy growth at 13 per cent year on year, the highest over the last six years, in the current fortnight partly supported by RBI's withdrawal of Rs. 2,000 denominated currency notes and higher interest rates on deposits, said CareEduge rating in a note.

Sequentially, it also expanded by 3.2 per cent.

Meanwhile, in absolute terms, bank deposits have increased by Rs 22 trillion in the trailing twelve-month period from the fortnight over a year ago period. Deposit growth was the highest in the fortnight since March 2017.

The value of notes received back from circulation after the withdrawal announcement was Rs 2.72 trillion upto June 30, 2023. About 76 per cent of the Rs 2,000 notes had returned till June 30, with 87 per cent being deposited and 13 per cent exchanged, according to RBI.

Trend in Deposit Growth (y-o-y, %) – Deposit Growth Highest in the Last Six Years ( Source: RBI, CareEdge)

 

Currently  the fixed deposit (FD )rates are nearing an all-time high as few banks and non-financial companies (NBFCs) are providing 8.5-9.36% interest rates on an annual basis.

FD rates provided by small finance banks as of July 12, 2023 ( Data provided by Paisabazaar)

Investors should keep in mind that returns from bank FDs are way below inflation. If you take tax into consideration, then the returns from FDs may very well be negative. So, unless FD returns are at least a couple of percentage points higher than inflation, they will not be an investment in the true sense. 
 

"However, as an FD account holder, it is important to understand the drawback that this investment instrument may not be able to beat inflation. The investment will lose value in case the FD interest rates stay below the inflation rate. In the long run, this could pose a problem," said ClearTax.

In that sense, FDs are  viable for short-term capital protection, such as in case of parking emergency funds.

FD rates provided by private banks as of July 12, 2023

 

The FD Interest Rates for the general public range from 3.00% p.a. to 9.50% for tenures from 7 days up to 10 years. Senior citizens are offered interest rates higher by 0.50% to 0.75% of the rates offered to the general public.

Meanwhile, credit offtake continued to witness elevated growth at 16.2% year on year (y-o-y) to reach Rs. 143.9 trillion for the fortnight ending June 30, 2023, driven by personal loans, NBFCs and agriculture & allied activities. In absolute terms, credit offtake expanded by Rs.20.1 trillion from July 01, 2022, vs Rs.15.6 trillion in the same period last year. "The outlook for bank credit offtake continued to be positive due to economic expansion, rise in capital expenditure, implementation of the Production Linked Incentive (PLI) scheme, and retail credit push. However, it is still expected to moderate from 15.0% in FY23 to 13.0-13.5% in FY24," said CareEdge. Also this: The spread between credit and deposits growth dropped to 326 basis points (bps) in the fortnight as against 875 bps (largest) in November 2022. This can be attributed to a rise in deposits in the last two-three fortnights.