INSUBCONTINENT EXCLUSIVE:
More than technology, the RBI is worried about greed
For a little over two years, credit has grown faster than deposits | Photo: Bloomberg6 min read Last Updated : Sep 03 2024 | 7:22 AM ISTBy
is reining in money growth to tame inflation
Separately, the government is making the deposit crunch worse by taxing savers aggressively, but keeping the proceeds away from the
The finance ministry wants depository institutions to undertake special drives to mobilise household savings, while the Reserve Bank of
The RBI wants banks to assume that any customer account connected to a smartphone is prone to faster erosion of deposits.
From next year,
banks in India will have to hold more safe assets like cash and government securities to meet the risk of runoff from internet-enabled
While this could slow systemwide credit, some individual lenders will have to do more to get out of their liquidity squeeze
HDFC Bank Ltd., the largest non-state bank, is planning to sell Rs 10,000 crore ($1.2 billion) of its advances to lower its loans-to-deposit
ratio, which has exceeded 100 per cent for four straight quarters, according to Bloomberg data.
More than technology, the RBI is worried
For a little over two years, credit has grown faster than deposits
Retail interest in the stock market has exploded in this period
The pie may get redistributed among lenders, and its composition may change
That is why state-run lenders are asking New Delhi to park its cash balances with them, instead of the monetary authority.
Where the RBI
may have played a role in the deposit shortage is in slowing down its printing presses
Last month, the pace of money creation crashed to under 4 per cent.
This is odd
(The two big exceptions in recent years were during the 2013 taper tantrum and in the aftermath of the sudden 2016 ban on 86 per cent of the
currency.)
In China, a squeeze on the monetary base used to be a feature of economic management, rather than a bug
which represents the excess of domestic savings over local investment, into deficit
Yet China kept racking up higher surpluses.
In a 2007 study, Michael Mussa, a former chief economist at the International Monetary Fund,
government securities to print new money
Since having too much of it around is inflationary, interest rates have to rise to cool demand
But China wanted to run its economy red-hot, with an undervalued currency giving it an edge in export markets
And since buying dollars from banks left them with more yuan, the PBOC then mopped up some of that liquidity.
By keeping a tight rein on
the monetary base, especially between 2004 and 2006, the PBOC denied households the purchasing power that ought to have resulted from rapid
economic growth, forcing them to save more at low, state-controlled deposit interest rates
That number used to be almost 80 per cent half a century ago
The investment rate, however, is still at about 31 per cent of output.
Never mind the 45 per cent rate at which capital formation in China
Can Modi raise the investment-to-GDP ratio to 36 per cent, the high achieved by India before the Global Financial Crisis of 2008-09? Even
This time around, the vulnerability may be building elsewhere
personal opinions of the writer
They do not reflect the views of www.business-standard.com or the Business Standard newspaperFirst Published: Sep 03 2024 | 7:22 AMIST
