Banks’ incremental credit to deposit ratio, the proportion of fresh deposits that banks use for fresh lending, has gone past the 100 percent mark. That signals that banks are selling their investment portfolio to meet credit demand adding pressure to liquidity in the system.
As bank credit grew at one of the highest levels since the pandemic at 14 percent, the incremental credit deposit ratio is at 113 percent as of July 15 and has hovered around the 100 percent mark since May this year, latest Reserve Bank data indicates. This indicates that interest rates are set to rise further.
” When there is credit offtake, there will be draining out of liquidity and there is always leakage of liquidity through an increase in currency in circulation” RBI governor Shaktikanta Das said in a banking seminar last fortnight. “We are also increasing our policy rates. So, going forward, the banks have already started adjusting their asset prices.”
On the liability side also, some banks have started increasing the deposit rates. The latest RBI data indicates that the weighted average domestic term deposit rate on outstanding rupee term deposits of commercial banks increased by 4 bps ( one basis point is 0.01 percent) in May to 5.07 per cent and by 6 bps in June following 90 bps hike in benchmark policy repo rates during the period. ” Going forward, when there is a requirement for liquidity the banks will steadily and slowly increase the deposit rates” governor Das said. ” When we increase the policy rates that also impact the deposit rates in the system on the liability side. There is transmission time but eventually, it will transmit to deposit rates also”. The monetary policy committee is expected to vote for upto 50 bps hike in when it meets this weekend as consumer inflation continues to remain above the end of the target band of 6 percent. The policy rate is currently at 4.9 percent, 25 bps below the pre-pandemic rate of 5.15 percent.
To be sure, incremental investment deposit ratio has remained below the 50 per cent mark most of the fortnights in the current financial year so far, indicating that banks are going slow on bond investments. Economists also attribute a pick in credit demand to the tightening of liquidity in the system. On an average, system liquidity surplus has averaged Rs 1.3tn in the current fortnight compared to Rs 2.7tn surplus seen in the previous fortnight. One of the factors contributing to the tightening liquidity is that credit accretion is happening at a faster pace, according to Dipanwita Majumdar, economist at