Rise in income, not interest rates, key to deposit growth: RBI research

What’s causing deposit growth rates to slow? Mutual funds? Gold? Property? None of these, says RBI. 

Central bank’s research paper says that the causes of slow deposit rates are neither mutual funds nor are gold and property. On the contrary, incomes rise fast when deposits quicken – and a robustly constructed economy often aids income.
From the data of household saving, it is to be found that there is a shift from bank deposit to stock and mutual fund schemes because the return is comparatively more profitable than the bank deposit in the recent past.
 
This apparent shift triggered Reserve Bank of India (RBI) researchers to study the saving deposit behavior changes in the economy.
In the short and long run, the study says that for deposit growth income is the most critical factor. Whereas, the correlation between interest rates and deposit mobilization seems rather weak. “The empirical study states that income is the most important factor and work as a determinant,” the study said. Previously a lot of experts and economists were debating over the slowdown of bank deposit growth, primarily due to revival in credit demand.
 
On March 31, 2019, outstanding bank deposits were RS 125 Crore, accounted for 128.7% of outstanding bank credit, showing low deposit growth. Structural liquidity gap in the system is also triggered by the increasing difference between lending and deposit growth. Over the long run financial inclusion boosts the deposit mobilization, suggesting expansions in bank branches in unbanked areas as well.
 
The study also suggests that in the short run there is a limit associated with Sensex returns for deposit growth, warranting a careful appraisal of tax arbitrage and regulatory reforms. It also finds that in the short run small savings eliminates bank deposits but make an additional deposit in the long run just like Sensex return.

 

So, the study concluded that a limit in income tax exemption balance the substitution effects and make income a vital factor of both, in the long run. Hence, for higher deposit mobilization fastening the rate of growth in the economy and disposal income is small savings .