Bank of America-Merrill Lynch (BofA-ML) today said the recent lending rate cut by RBI will not give the much-needed leg-up to the tepid credit growth, but deposits will pick up momentum from next month.
In a note, BofA-ML India economist Indranil Sengupta pegged deposit growth picking up to 15-16 per cent by March on the CRR (Cash Reserve Ratio) cuts/OMOs (Open Market Operations) and base effects but loan demand is likely to come off on high lending rates.
"We expect the RBI to cut CRR/carry out more OMOs to ease liquidity going forward. It should cut policy rates by 25 bps each on May 3 and in June. This should bring down lending rates by 25 bps now and 75 bps in FY14 atop 50 bps since March 2012," Sengupta said.
On deposits he said: "It should pick up to 15-16 per cent by March from the current 13.3 per cent on the CRR cuts/OMOs and base effects. But loan demand will likely continue to come off on high lending rates."
About the high liquidity deficit, he said this is because RBI's forex intervention has sucked out the rupee from the system.
The RBI will bring in an additional Rs 18,000 crore by implementing the CRR cut effective the fortnight beginning February 9. This will help contain liquidity deficit at Rs 70,000-1,00,000 crore in February-March, Sengupta said.
He said so far RBI has sucked out USD 35 billion worth rupee liquidity from the market through forex intervention.
"We estimate that it needs to inject about Rs 2,10,000 crore, or USD 40 billion of reserve money a year, via CRR cuts, OMOs and forex purchases, to generate 16 per cent M3 growth to fund 7.5 per cent growth," Sengupta said.
According to Sengupta, the RBI has so far injected only Rs 1,29,000 crore by way of OMOs. The 75 bps cut in the CRR has just about counter-balanced the USD 11 billion of forex forwards contracted this fiscal, leaving Rs 1,00,000 crore liquidity shortfall in the system.
Though he blamed the negative real rates behind the reason for slowing deposit growth, he discounted the widely held argument that this is forcing the people to shift to savings in gold and real estate.
The BofA-ML economist said at 14.6 per cent, the time deposit growth is running way above demand deposit growth, which at 1.9 per cent.
"Had negative real rates been dissuading savings or savers shifting to gold or real estate as a hedge as inflation, we should expect households to break down fixed deposits to draw cash or write checks to buy property or gold. In reality, time deposit growth, at 14.6 per cent, has outstripped demand deposit growth (1.9%) or cash demand."
On the declining savings, which had dipped to 27.4 per cent as of the December quarter, he said over 60 per cent of this drop (which is only 10.8 per cent of GDP from a high 17.8 per cent in FY07) is driven by cyclical tightening by RBI to rein in inflation.