When do you keep more cash in hand or in your current or savings account in the bank? When you want to spend your money quickly, right? Conversely, when uncertainty about the future increases and people are afraid of losing their jobs, they prefer to save for a rainy day.
Now consider what Reserve Bank of India data shows. As the chart illustrates, the “currency with the public” component of money supply (M3) has fallen from a year-on-year (y-o-y) growth rate of 20.7% at the end of October to 17.2% in the middle of January. That means people are keeping less cash in their pockets. In economic terms, it probably means a lower “propensity to consume”. That opinion is reinforced by the data on demand deposits with banks, the change in which has been much more dramatic. Demand deposits are deposits typically lying around in current accounts and used by individuals and businesses for their day-to-day needs. As can be seen from the chart, the y-o-y rate of growth of demand deposits has fallen from a healthy 14.3% at the end of October to -0.8% by mid-January. Part of the reason could also be that companies no longer have surpluses that they can afford to keep lying around in current accounts. Lower working capital requirements, as a result of scaling down of operations, could be another reason.
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Over the same period, however, consider the rise in the y-o-y rate of growth of term deposits. Growth in term deposits with banks went up from 20.8% at October-end to 23.1% in mid-December, before decelerating a bit to 22.5% in mid-January. During the period, the y-o-y rate of growth of M3 went down from 19.9% to 18.7%. Interestingly, in mid-January last year, the y-o-y growth in currency with the public was lower at 15.3%, but the rate of growth in demand deposits with banks was much higher at 25.9%.
In sum, what the numbers underline is that in the last few months, people as well as businesses prefer to save for the future rather than spend their money. That will obviously have serious implications for demand in the economy. At the industry level, the fact that deposit growth is now coming wholly from term deposits means that banks’ funding costs are going up. The saving grace is that once election spending starts, the “currency with the public” metric should show a higher rate of growth.
Graphics by Ahmed Raza Khan / Mint
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