Deposit growth may remain muted in FY13 around 13-15%: ICRA

ICRA has come out with its report on RBI's annual policy statement for FY 2012-13 - April 2012. According to the research firm, the space for further reduction in policy rates is limited and the upside risks to inflation, further Repo Rate and CRR cuts are expected to be restricted to 25 bps each in FY13.

RBI cuts repo rate by higher-than-expected 50 bps; shift in stance to address moderating growth

• Benchmark Repo Rate reduced by 50 basis points (bps) from 8.50% to 8.00% with immediate effect; Reverse Repo, Marginal Standing Facility (MSF) and Bank Rate automatically stand readjusted at 7.0%, 9.0% and 9.0%, respectively.
• Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) unchanged at 4.75% and 24% respectively.
• Marginal Standing Facility (MSF) borrowing limit hiked to 2% of Net Demand and Time Liabilities (NDTL) from 1% to provide additional liquidity comfort.
• Focus of monetary policy shifts to growth but RBI remains cautious regarding inflationary concerns and potential fiscal slippage; GDP growth for 2012-13 projected at 7.3%.
• Headline inflation expected at 6.5% at end March-2013.
• FY13 Credit growth projected at 17%.
• M3 and deposits growth for FY13 pegged at 15% and 16%, respectively.
• RBI to issue final guidelines on capital norms for implementation of Basel III guidelines on capital regulations by end Apr-12 and for liquidity standards by end May-12. Final guidelines for securitisation also expected by Apr-12.
• RBI tightens Bank lending to gold-loan NBFCs; single party exposure reduced to 7.5% of capital funds for such exposures and asks Banks to maintain internal ceiling for aggregate exposure.

Deposits growth rate falls in FY12; RBI indicates improved growth of 16% in FY13

The total deposits of the Indian Banking System stood at Rs. 61.12 lakh-crore as on March 30, 2012, with the y-o-y growth dropping to 14.2% compared to 17.2% at the end of December 2011. The Banking system garnered incremental deposits of only Rs. 1.6 lakh-crore in Q4FY12, the lowest amount mobilised in Q4 of any fiscal in the past 6 years, despite Banks maintaining high interest rates on deposits. In absolute terms however, deposits have increased by Rs. 7.88 lakh-crore since April 8, 2011, higher than Rs. 7.18 lakh-crore during FY11.

Demand deposits have steadily declined throughout FY12 but a spurt in the last week of March 2012 resulted in an increase in its share in aggregate deposits to 12.1% from 11.8% at the beginning of the fiscal. Demand deposits registered growth of 18% during FY12 to Rs. 7.4 lakh-crore as on March 30, 2012 compared to Rs. 6.26 lakh-crore on April 8, 2011.

Most Banks continue to maintain their deposit rates at relatively higher levels. Moreover, a few of the larger Banks increased the deposit rates by ~ 25 bps in March 2012. Even as other asset classes are likely to generate moderate returns, the overall deposits growth remained muted in FY12 reflective of a fall in the overall savings rate in the economy. Banks could begin to cut deposit rates in Q1FY13 and despite inflation easing, ICRA expects deposit growth to remain muted in FY13 around 13.5-15% in FY13, lower than the projection of 16.0% made by the RBI.

The RBI’s move to reduce the Repo Rate by a higher-than-expected 50 basis points is likely aimed at shrinking the time lag with which Banks reduce their lending rates, in order to provide an early boost to investment and consumption sentiment. The increase in the limits under the Marginal Standing Facility would also improve the liquidity situation. However with the hawkish guidance provided by the RBI that the space for further reduction in policy rates is limited and the upside risks to inflation, we expect further Repo Rate and CRR cuts to be restricted to 25 bps each in FY13.

The magnitude of the Central Government’s borrowing programme suggests that substantial open market bond purchases would be necessary for credit growth to expand in line with the 17% projected by the RBI. The markets eagerly await the final guidelines on implementation of Basel III guidelines and Securitisation which is expected by end-April 2012.

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