Surplus cash with banks — deposits and borrowings that they retain after lending and investing — shot up by 274.6% to a record high of over R2.47 lakh crore in the fortnight ended November 11, data released by the Reserve Bank of India (RBI) shows. The amount includes money that came in post November 8, when the demonetisation of higher currency notes was announced and resulted in the credit to deposit ratio falling to a six- year low of 72.7%.
The rise in inflows has seen banks trim interest rates on deposits with one-year money fetching customers less than 7%.
Unless deposit rates are dropped further or the money moves out quickly, the influx of cash and the lack of opportunities to lend could result in a hit to net interest margins. A 6% interest rate on R4.1 lakh crore of additional deposits, that have flowed into the system, would cost the system Rs 24,000 crore per annum. In the absence of adequate lending opportunities at attractive yields, could eat into margins. However, banks have parked the surpluses in gilts going by the the over 50 bps drop in the 10 year benchmark yield since November 8. Foreign portfolio investors (FPIs) have sold debt paper worth over $2 billion since since November 8, data released by SEBI reveals. The sales by foreign investors in the bond and equity markets has been partically responsible for the rupee weakening to 68.56 against the greenback.