The credit policy statement overviews the economy, analyses pain points, and delivers a verdict on the repo rate. It also encapsulates the state of the world economy, making the narrative quite comprehensive. One area which could probably be considered for incorporation in the document is savings.
The growth in savings affects banking significantly. Any talk of deposits in terms of growth or composition reflects the circumstances on the savings front. In fact, the major raw material for the banking system is deposits. This element does not find mention in the statement although it is a vital part of the monetary ecosystem.
First, deposits serve as the base for credit generation. Slower growth in deposits relative to credit leads to the second issue of liquidity. Liquidity is always spelt out in the statement as the Reserve Bank of India (RBI) underscores how it has evolved during the period under consideration. In fact, any measure to stabilise liquidity is a result of what has been playing in the background — deposits. The basis of having variable rate repo or variable rate reverse repo is dependent on how the deposit factor has played out.
Third, the growth in deposits also has a bearing on what happens to bond yields through the liquidity route. Tightness in liquidity invariably ensures bond yields either stiffen or remain unchanged even if the repo rate is lowered. When the central bank targets the weighted average call rate as part of monetary policy, the state of deposits is again important as it affects liquidity. Therefore, deposits are a very critical part of the liquidity piece.
Deposits are also important as they relate to the transmission process. Very often, the policy statement has spoken of incomplete interest rate transmission. While a part of the lending rate transmission takes place automatically when the repo rate is changed, it is not so for the marginal cost of funds-based lending rate-linked credit. For the needle to move, the deposit rates matter. Therefore, the entire edifice of the efficacy of the repo rate transmission rests on the action taken by banks on the deposit rates. This would, in turn, depend on the rate of growth of deposits.
In fact, in the past three months or so, the RBI has continually tried to plug the liquidity gap caused by slow growth in deposits through various measures before lowering the repo rate. In a way, the precondition for lowering the repo rate to be effective has been met not through the system, but through RBI intervention.
The motivation of changing the repo rate was based traditionally on targeting inflation, though of late, the focus has shifted to growth too. The mandate of the Monetary Policy Committee (MPC) was to target inflation, while the policies prior to its establishment aimed to balance growth and inflation. The MPC also had to ensure a lower repo rate got transmitted to lower lending rates, enabling borrowing and boosting growth. But, progressively, the transmission gets sticky mainly due to problems with deposits. There can hence be a case for the policy statement to evaluate the state of deposits separately.
The credit policy deals with banks in particular, but savings span a wide section of institutions. While banks are the mainstay, migration is seen to other avenues like mutual fund (MF), insurance, pensions, etc. It means savers have tended to turn into investors and venture into the market. Both MFs and the National Pension System have this orientation. This has become more significant during the pandemic when the repo rate was lowered to 4% and deposit rates went down. With the markets doing well, there was a natural tendency for funds to move away from the banking system.
The deposits issue became quite serious in FY25 where the liquidity deficit grew, partly also due to government spending being on the slow track due to elections. This is important from the monetary policy standpoint as the RBI is doing everything to push up liquidity, but it is only scratching the surface. The problem lies in deposits, not growing at a suitable pace.
So it may be relevant for the MPC to deliberate on savings when discussing the repo rate. As the pace of growth in deposits has a direct bearing on liquidity, it would be useful to consider this factor as it will impact the transmission of rates. By focusing more on lowering the repo rate when the system needs central bank support on a daily basis, the onus has shifted to the RBI. This works in the short run, but cannot in the medium term. It is possible that when the new fiscal year starts liquidity will normalise, as demand for credit tends to be low.
But savers are looking at the market, which should be seeing upward traction once India Inc performs better. Such situations can recur more frequently. This may not be unique to India as the monetary policy statements in other countries too do not really talk of this aspect. But then there has been large-scale quantitative easing, which is only being rolled back periodically. In India, there was never such a quantitative easing process. That makes it even more important to consider the deposits factor.
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