The Reserve Bank of India’s (RBI) most recent State of the Economy Bulletin said that pressure on net interest margin (NIM) may soon compel commercial banks to match loan growth more closely with deposit growth.
The study emphasised the disparity between the two financial measures because, for more than a year, deposit growth has continuously exceeded loan growth. Because of this pattern, authorities are pressuring banks to increase their resource mobilisation initiatives.
The most recent statistics shows that as of July 26, bank credit growth was up 13.7% year over year, while deposit growth was slower at 10.6%.
The study, written by RBI employees, said that banks were forced to boost the amount of money they mobilised through certificates of deposit, high value savings accounts, and fixed deposits in the quarter that ended in June 2024. “Going forward, banks may reduce their domestic fundraising efforts through high-cost funding options due to a likely squeeze on their net margins resulting from the low share of low-cost current and savings deposits in total deposits.”
The writers of the report, not the RBI, are the ones who have aired their opinions.
It said, “This may also force banks to normalise incremental credit-deposit ratios and align loan growth more closely with deposit growth.” “This change in behaviour could be partially caused by indications of stress in the unsecured loan segments, particularly in the portfolios of credit cards and personal loans.”
According to the bulletin, bank certificate of deposit (CD) issuances increased significantly in 2024–25 (till August 9), reaching ~3.49 trillion as opposed to ~1.89 trillion over the same period in the previous year. The slower rise in deposits than in credit is thought to be the cause of this surge in CD issuance, which is forcing banks to look for other sources of funding.
Regarding headline inflation, the report emphasised a decrease that fell short of the 4% monetary policy target, but it also pointed out that statistical base effects were the primary cause of this.
“…inflation moderated from its June spike to below the target of 4 percent in July, but this was primarily because of large base effects that had a downward statistical pull, masking the significant price build-up in the food category,” the report stated.
It made note of the fact that the Consumer Price Index (CPI) for food in July had significantly higher price momentum than long-term averages. It also stated that the CPI headline momentum was above trend.
Concerns were expressed in the report over the persistence of the price shock for vegetables, the double-digit inflation seen in pulses, and the increased inflation of grains. After appearing to be cooling off between June 2023 and May 2024, core inflation increased somewhat once more. According to the research, these events “impart an upside (risk) to the overall inflation outlook.”
Positively, the bulletin showed that following a downturn in the April–June period, aggregate demand conditions were picking up steam. Rising incomes in rural areas are encouraging consumption, which is starting to drive the fast-moving consumer goods (FMCG) industry’s expansion.
According to the report, FMCG companies are beginning to observe signs of recovery, which is indicative of these drivers of turnaround.
The report noted that there are early signs of new capacity creation in a few industries as well as an increase in investment intentions. “These factors which act as stimuli to demand are expected to reinvigorate the hitherto subdued private sector participation in total investment, a key accelerator of overall growth of the economy in view of higher levels of productivity and innovation,” the report said.