Demo Hasn't Dented Deposits

Demonetization has resulted in a permanent improvement in bank deposits while not really inspiring large withdrawals among people in its aftermath

On 8th November, 2016 the government made a shock announcement that Rs.500 and Rs.1,000 notes would be demonetized to curb black money, counterfeiting and fight terrorism. The move resulted in about 86% of the total value of currency being taken off from circulation.

It is also likely to have short and long-term effects on the economy. One reason for this is the impact on interest rates.

Banks have witnessed a great leap in deposits. This was mainly because of the short deadline for depositing currency notes during the said period. Around Rs. 5.5 lakh crore had already been deposited in banks till November 18, as per government data. This resulted in high liquidity in banks. In comparison, currency worth Rs. 1.03 lakh crores has been issued till November 18. Since it took weeks before the new currency to get into active circulation deposits increased.

Simple demand-supply economics, as the supply (deposits) increases, prices (deposit rate) fall. And that’s what had happened. Most banks had announced a cut. The biggest bank in India, State Bank of India, has shook Indian financial markets when they had announced savings bank interest rates cut by 0.5% from erstwhile 4% levels to 3.5%. As leader of the banking industry announced interest rate cut, several other banks have followed the suit.

Further, ICICI Bank and HDFC Bank have cut interest rates of Fixed Deposits by as much as 0.25%.

Yes, the demonetization caused deposit rates to dip, but there is other aspect to this story. Excessive deposits coupled with a poor demand outlook for credit will force lending rates to decrease too. This will be a gradual process and the number of people seeking loan at cheaper rates will slowly increase.