Savings rate: Root of C-D mismatch?

Scheduled commercial banks (SCBS) are under increasing pressure to mobilise large deposits because the incremental credit-deposit (C-D) ratio has reached 98 per cent.

- JANAK RAJ

The ratio is usually less than 80 per cent, as banks are required to maintain a cash reserve ratio of 4.5 per cent and a statutory liquidity ratio (SLR) of 18 per cent on their deposits. Banks usually hold excess SLR securities, allowing them to sustain the incremental C-D ratio above 77.5 per cent as long as these excess securities are available.

Before the current tightening in monetary policy began in May 2022, credit growth of SCBS was 11.2 per cent year-on-year as of April 22, 2022, deposit growth was 9.8 per cent, and the incremental C-D ratio 80 per cent. By February 8, 2023, the Reserve Bank of India (RBI) had raised the policy repo rate by 250 basis points (bps). However, there was little evidence of monetary transmission, as credit growth accelerated to 15.4 per cent by end-May 2023, whereas deposit growth picked up marginally to 11.8 per cent. Consequently, the incremental C-D ratio surged to 94 per cent. The situation worsened further by August 9, 2024, when the incremental C-D ratio rose further to 98 per cent, driven by robust credit growth (15 per cent), even as deposit growth moderated (11.3 per cent).

The rise of almost 20 percentage points in the incremental C-D ratio even more than two years after the RBI began monetary tightening is counter-intuitive. In this context, it is significant that interest rates by SCBs were raised by 1-1.9 per cent on term deposits of different maturities during the current monetary tightening cycle. However, interest rates on savings bank deposits by major banks were left untouched at 2.7-3 per cent, which needs to be put in perspective.