High real interest rate causing lower growth of banks

A high real interest rate leads to a decline in the growth rate of bank deposits – a trend that has prevailed since late 2014, according to an SBI report.

According to the bank’s research report, despite a relatively high real interest rate, banks’ deposit rates have not increased.

“Deposits with all scheduled commercial banks (ASCBs) remained low with weak growth of 9.9% in fiscal year 2015-16 (through March 2016),” the report said.

“This has resulted in a serious shortage of funds from banks for lending purposes,” he said.

SBI Chief Economic Research Advisor Soumya Kanti Ghosh, author of the report, said: “Contrary to popular perception, a high real interest rate actually leads to a lower deposit growth rate.

“The divergence between the two has been widespread since September 2014,” Ghosh said.

“We believe that since high real deposit rates are a by-product of lower inflation, such negative causation can cause people to spend more / flee through currency,” he said. added.

In addition, the report noted that the drop in deposits could also be attributed to the increase in remittances abroad.

According to data from the Liberalized Transfer System (LRS), outgoing transfers have tripled from $ 106 million in May 2015 to $ 449 million in February 2016, due to the revised cap. he adds.

The LRS is a mechanism for residents to deposit money for any authorized transaction on a current or equity account or a combination of the two through a prime broker.

Since its introduction in 2004, the ceiling has been revised upwards at the end of May 2015 according to the economic scenario in force. Currently, the limit is $ 250,000 per fiscal year (April-March).

“All of this points to a growing propensity for foreign consumption rather than savings,” the report said.

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