Indians shunned one-two year term deposits during demonetization: report
Experts believe that the change in savers' preferences was a knee-jerk reaction to demonetization
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Business News/ Politics / Policy/ Indians shunned one-two year term deposits during demonetization: report
Mumbai: For the first time in more than two decades, Indians decided against one or two-year term deposits and instead moved to shorter- or long-term deposits in the year of demonetisation, showed data from the Reserve Bank of India (RBI).
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Released as part of its Handbook Of Statistics On Indian Economy, the RBI data showed deposits in the most popular bracket—maturities of one to two years—fell 3.25% to ₹ 25.42 trillion in FY17.
Deposits in this category last fell in 1996, declining 7.64% to ₹ 61,277 crore.
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Despite the fall, the category still remained the most popular, with more than 101.8 million depositors choosing it over other products in 2016-17.
Short-term fixed deposits of six months to one year tenure rose 50% on-year to ₹ 8.4 trillion.
On 8 November 2016, high value notes of ₹ 1,000 and ₹ 500, constituting 86.9% of the currency in circulation, or ₹ 15.4 trillion, ceased to be legal tender following a government announcement. The move led to a surge in bank deposits.
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According to a Mint Street Memo published by the RBI on 11 August, 2017, notes in circulation declined by about ₹ 8.8 trillion between 28 October, 2016 and 6 January 2017.
This was largely reflected in an increase of about 4 percentage points in the share of the current account and saving account (CASA) deposits, or low-cost deposits.
While agreeing that one or two years was what most depositors preferred, experts believe that the change in savers’ preferences was a knee-jerk reaction to demonetization of high-value currency notes.
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Former RBI deputy governor S. S. Mundra said people could have factored in a rise in interest rates and, therefore, did not want to lock-in their savings for longer durations.
He added that such instances also happen when people plan to move to other asset classes and not depend on bank fixed deposits.
From 17 November, 2016 to 28 February, 2017, State Bank of India’s depositors earned 6.9-6.95% interest on one- and two-year term deposits, and between 5.5-6.5% for deposits of less than 180 days.
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“That is also the period when new small finance banks started operations and it could be that depositors wanted to test the waters with smaller tenure deposits," said Mundra.
Meanwhile, longer tenure fixed deposits of three to five years and five years and above have grown by 22% year-on-year and 12% year-on-year, respectively.
Karthik Srinivasan, group head, financial sector ratings, ICRA, agreed: “While there is no one reason why this has happened, I believe it could be because depositors expected effects of demonetization to settle down sooner. Therefore, blocking funds for two years in a bank did not make sense."
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The Mint Street Memo showed that cash deposits across seven accounts types with 52 banks amounted to ₹ 4.35 trillion in November-December 2016, compared to ₹ 3.06 trillion in the year-ago period.
Since demonetization was not a usual phenomenon, the behaviour of depositors cannot be compared to the previous years, said the managing director and CEO of a mid-sized public sector bank, requesting anonymity.
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