High interest rates on fixed deposits (FD) are luring investors to park their money with the banks resulting in a fall in growth of currency in circulation. Banks are witnessing a strong deposit growth of around 20 per cent compared to last year on the back of high interest rates on fixed deposits that is higher than the rate at which money is being circulated in the system. According to a report by Nomura, there has been a steady fall in the growth of currency in circulation in June compared with last year. Growth in currency in circulation has been falling steadily from its peak of 21.2 per cent year-on-year in August 2010 to a 14-month low of 15.8 per cent in June, said Nomura. “Opportunity cost of holding cash has gone down. As the deposits rates are high and attractive, investors are putting their money in FDs,” said Sonal Varma, India economist, Nomura. According to Nomura, another reason for fall in currency in circulation is the slowdown in economic activity and a moderation of asset prices which has reduced transaction demand for money. Most banks are offering 8-8.5 per cent interest on fixed deposits of one to three year maturity. The Small Industries Development Bank of India (Sidbi) has begun offering 9.8 per cent interest on FD of 12-13 months maturity, highest rate offered by any bank for the 12-month tenure. Deposit rates which had peaked to 10 per cent for one to three year maturity in end of 2008, had fallen to 6-6.5 per cent during end of 2009 and till end of 2010. Interest rates started picking up in the last quarter of 2010-11 after series of rate hikes by RBI. According to the Reserve Bank of India data, deposits for the banking system grew 18.21 per cent year-on-year in the fortnight ended June 17 to Rs 53,44,700.99 crore. Interest on bank deposits have gone up by 2.75-3 per cent across various maturities in the last one-year. P Sitaram, chief financial officer, IDBI Bank said that there has been an increase in deposits this year due to higher rates. A senior official of Bank of Baroda said, “For monetary transmission of RBI’s series of rate hikes since March 2010, banks have been forced to hike deposit rates. The rates are very attractive for retail investors. In this quarter we have witnessed a strong growth in deposits.” The sharp rise in currency in circulation last year was due to a mix of factors. High inflation, strong growth, low bank deposit rates and rising asset prices were cyclical factors driving increased public demand for cash from transaction.
Financial Chronicle
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