Higher deposit growth, owing to attractive interest rates and a slower pace of loan disbursements, led to narrowing of the gap between credit-deposit growths. If the trend continues, banks’ liquidity would improve, facilitating the easy pass-through of the government’s borrowing programme, without stoking yields.
Despite advance tax payments resulting in a dip in bank deposits in the fortnight ended June 17, the growth rate, at 18.2 per cent, was marginally higher compared to the year-ago period. The central bank had estimated banks’ deposit growth at 17 per cent in 2011-12. The growth in bank advances continued to decline, with an annual growth rate of 20.7 per cent as on June 17.
December 2010. Economists at Nomura expect this trend to continue. “The widening gap between inflows (deposits) and outflows (credit) bodes well for banking system liquidity,” said Sonal Varma and Aman Mohunta, economists, Nomura. Banks would not need to raise funds through high-cost deposits if the liquidity improved, they added.
Another outcome of improved liquidity would be a higher demand for government securities. “Given the moderation in credit growth, banks may be forced to deploy higher incremental funds in government securities, thereby keeping the demand for bonds high and positively impacting the bond market,” said Deepali Bhargava, economist, ING Vysya Bank. The yield on the 10-year benchmark government bond has hardened by about 50 basis points since April. Today, the yields closed at 8.31 per cent, compared with Tuesday's close of 8.28 per cent.
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