Budget Snapshots | Rising incremental credit to deposit ratio calls for budgetary measures to spur deposit growth

India needs an economic stimulus, to emerge from a slowdown that is taking root. One possible answer is an expansionary fiscal policy where the government spends more to create demand and encourages economic activity. That doesn’t seem to be an easy solution with a high fiscal deficit. The other answer is a monetary stimulus by lowering interest rates. The Reserve Bank of India has already reduced policy interest rates by 75 basis points (1 percent equals 100 basis points) in 2019.

But borrowers are not seeing it, as banks have not passed on the reduction. One reason for the weak transmission is tardy growth in deposits, which affects the ability of banks to lower deposit rates. This is reflected in a high incremental credit to deposit ratio. The budget could introduce measures to encourage savers to direct more flows to bank deposits. This could take the form of tax incentives or even by lowering rates on small savings schemes.