Banks’ incremental credit to deposit ratio, or the proportion of new deposits that banks use to make new loans, has exceeded the 100% mark. This indicates that banks are liquidating their investment portfolios to meet credit demand, further putting pressure on system liquidity.
To ensure this, banks are required to set aside a portion of these funds to ensure that the financial system is sufficiently risk-free. To maintain that limit at the aggregate level and meet the legal mandate, banks are phasing out bond investments in the absence of sufficient deposit creation.
Bank credit grew at the fastest pace since the pandemic at 14%, and the incremental credit deposit ratio is at 113% as of July 15 and has been hovering around the 100% mark since May this year, latest reserve bank of india ,reserve Bank of India) shows the figures. This indicates that interest rates may rise further.
“When there is credit offtake, liquidity will be exhausted and there is always leakage of liquidity through 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, banks have started adjusting their asset prices.”
On the liability side also, some banks have started increasing the deposit rates. Latest RBI data shows that the weighted average domestic fixed deposit rate on outstanding rupee instruments at commercial banks rose by 4 basis points to 5.07% in May and 90 basis-points in benchmark policy repo rates after rising by 6 basis points in June. occurred after the increase. Duration. One basis point is 0.01%.
Governor Das had said two weeks ago, “Going forward, when liquidity is required, banks will increase deposit rates continuously and gradually. “When we increase the policy rate, it also affects the deposit rates in the system on the liability side. There is transmission time but eventually, it will also transmit on deposit rates.”
The central bank’s monetary policy committee is expected to vote for a hike of around 50-basis points when it meets later this week as consumer inflation remains above the target band of 6%. The policy rate currently stands at 4.9%, which is 25 bps lower than the pre-pandemic rate of 5.15%.
To be sure, the incremental investment deposit ratio has been below the 50% mark for most of the fortnight so far in the current fiscal, indicating that banks are slow on bond investments.
Economists also attribute the pick-up in credit demand to the tightening of liquidity in the system. The system liquidity surplus in the current fortnight has averaged ₹1.3 lakh crore, as against ₹2.7 lakh crore surplus seen in the previous fortnight.
One of the factors contributing to tight liquidity is that credit accretion is happening at a faster pace, according to Deepanvita Majumdarieconomist,
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