After demonetisation, when banks were inundated with cash deposits, one frequent question was: how much of these extra deposits would be permanent? Would bank customers withdraw the money after the situation went back to normal, or would they decide not to keep so much cash in hand, and rather keep it in the bank? The answer would determine whether the surge in bank liquidity would continue and, therefore, mean lower interest rates on bank deposits for longer.
The chart shows the year-on-year (y-o-y) percentage rise in bank deposits up to 3 March 2017, the latest date for which Reserve Bank of India (RBI) data is available. Deposit growth with scheduled commercial banks was 9.84% on 28 October, just before the note ban. It moved up dramatically thereafter, as the chart shows, but even on 3 March, the y-o-y growth was 12.2%, well above the pre-demonetisation growth rate.
That means liquidity with the banks continues to be abundant, particularly as credit growth has slumped to a mere 4.09% as on 3 March. Credit growth before demonetisation was 8.68%, as on 28 October. Most of the excess liquidity with the banks has been invested in government securities, pushing down their yields, which has resulted in lower yields on corporate bonds, too.
True, it remains to be seen whether there will be an impact on bank deposits now that the restrictions on cash withdrawals have been completely removed. Nevertheless, a large part of the extra cash deposits gathered by demonetisation seems to be sticky. If people are keeping less cash with themselves and more with banks, then that is one positive fallout of demonetisation.