Demand deposit growth slumps on inflation woes

Written by fe Bureau | Mumbai | Updated: Dec 14 2013, 20:24pm hrs
Growth in demand deposits has seen a considerable slowdown over the past few months, with high inflation, a pick-up in rural spending and tax payments being cited as possible reasons.

Demand deposits are funds held in an account which can be withdrawn any time without any advance notice to banks, which usually consist of current and savings accounts (Casa).

Between August and November, demand deposits grew only 2.38% in FY14 against 6.47% in the year-ago period, according to Reserve Bank of India data. For the fortnight ended November 29, demand deposits grew 7.49% year-on-year to R6,69,227 crore, even though overall deposit growth was much higher at 16.12% during the same fortnight. This was the slowest growth in demand deposits in four months.

Bankers say that with term deposits offering higher interest rates, customers are choosing to move their money away from demand deposits in order to get a better yield. People would rather invest their money in flagship deposit schemes, which offer a better interest rate, rather than the low-yielding current and savings accounts, said SK Jain, executive director, Union Bank of India.

Generally when your interest rates go up, your Casa growth suffers. If you also look at the numbers, Casa deposits as a percentage of total deposits has come down, added a senior official at private bank.

The high inflationary environment, which eats into savings, is also generally seen as a cause of lower growth in deposits, particularly demand deposits. Bankers, however, feel that inflationary pressures may not be the chief cause of lower growth in accretion to deposits. For November, CPI inflation jumped to 11.24% from 10.17% in October.

Seasonal factors, such as advance tax payments due by mid-December, are also being seen as a reason for the steep fall in demand deposit growth in the latest fortnight. This is the season for people to pay their taxes and most companies pay their taxes from their current or savings accounts, said Ram Sangapure, executive director at Central Bank of India.