Deposit Growth Will Soon Outweigh Credit Growth: SBI Research

The latest report by State Bank of India (SBI) research anticipates that soon deposit growth will outweigh credit growth. "Interestingly the yearly gap between credit and deposit growth has narrowed down to 150 bps during the latest fortnight which is lowest since 6 May 2022. This indicates that deposit growth will soon outweigh credit growth," said the report.

Notably, during the fortnight ending 8 April 2022, when credit growth was lower than deposit growth the gap was lowest at just 20 basis points.

The latest fortnightly data of the Reserve Bank of India (RBI) shows that credit growth continues to outpace deposit growth.

Credit growth was recorded at 13 per cent (year-on-year) as of 20th September 2024 and deposit growth at 11.5 per cent. However, during the same period last year, credit growth was recorded at 20 per cent as against a deposit growth of 13.2 per cent.

On an incremental basis, year-to-date (YTD) deposits grew only by 5.0 per cent to Rs10.3 lakh crore compared to FY24 YTD growth of 6.9 per cent at Rs12.4 lakh crore. Credit grew by 4.2 per cent YTD to Rs6.93 lakh crore, compared with last year's growth of 10.8 per cent at Rs14.7 lakh crore.

So, incrementally, deposits declined by Rs44,755 crore during the fortnight while credit grew by Rs78,769 crore. The SBI report observed that the slowdown in deposits created a misplaced narrative of lower money supply growth in an inflation-targeting framework.

The report stated that the apparent slowdown in deposits has also ensured misplaced narratives gaining crescendo with a lower money supply growth being cited as a potent reason for lower reserve money creation and hence lower deposit growth.

It added, "However, in an inflation targeting framework, money is endogenous, and also the link between money supply and reserve money is agnostic as digitisation has resulted in an increasing money multiplier with much lower currency leakage"

The central bank operates in an IT framework and keeps inflation under check through changes in policy rates with a balancing act to keep growth momentum. The central bank doesn't target monetary aggregates but uses interest rates as the instrument variable.

The report stated, "In an IT framework money evolves endogenously in tune with the structural changes in the economy as well as the evolution of the payment system landscape. Endogeneity ensures that bank credit creates deposits and not reserves. Results from our Granger Casualty analysis also indicate that credit granger cause deposits and hence a decline in credit will lead to decline in deposits going forward." (ANI)