India experienced its fastest deposit growth since 2016, driven by foreign-currency inflows under the RBI’s special FCNR(B) swap scheme; however, this boost is expected to be temporary as banks rely more on domestic liabilities to sustain credit expansion.
India’s bank deposit growth could lose some of its recent pace as the Reserve Bank of India’s special FCNR(B) swap window closes, after a burst of foreign-currency inflows helped lift liabilities at a faster clip, CareEdge Ratings said. Deposits were up 15.4% year on year as of July 31, compared with 12.7% a fortnight earlier and 10% a year earlier, the fastest expansion since December 2016. Incremental deposits rose by Rs 6.6 lakh crore in the fortnight, according to the report.
The surge was led by time deposits, which rose 14.8% from a year earlier to Rs 235.1 lakh crore and made up 87.3% of total deposits. CareEdge said the jump was supported by strong mobilisation of FCNR(B) deposits under the RBI’s special swap facility, with inflows reaching $36.7 billion by July 31 and climbing to $52.3 billion by August 13. The central bank has since advanced the deadline for the facility to August 31 from September 30 after inflows came in stronger than expected.
Even so, the report suggests the boost from the scheme is unlikely to last. Banks will need to keep leaning on domestic retail and term deposits to fund lending if credit demand remains firm, especially as competition for household savings stays intense. The latest deposit increase did ease pressure on funding: incremental deposits of Rs 6.57 lakh crore outpaced credit growth of Rs 3.45 lakh crore in the same fortnight, trimming the credit-deposit gap to 395 basis points from 503 basis points and pulling the loan-to-deposit ratio down to 81.9% from 82.7%. Still, that ratio remains above 78.9% a year earlier, underlining the need for continued liability mobilisation.
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