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Showing posts from March 19, 2019

Where are the deposits? RBI’s policy transmission hits another roadblock

The Reserve Bank of India (RBI) has struggled for more than a decade trying to ensure that policy rate changes end up getting reflected in bank lending rates. Fed up with banks unwilling to play ball on lending rates, the central bank has changed the math behind loan rates thrice in the last decade. How banks calculate their loan rates could change yet again this year, if RBI goes ahead with a proposal to link them with external benchmarks. But this time, the math is not the central bank’s only problem. The growing currency in circulation is a greater risk at present, given the implications on liquidity. The fact that it has far exceeded deposit growth makes the problem bigger. Analysts at Edelweiss Securities Ltd point out that currency in circulation as a proportion of deposits is back to pre-demonetization levels and higher than the average in the past 25 years. Falling deposit growth and rising cash among Indians are twin blows to liquidity in the banking system. Edelweiss’s analyst…