Interest rates: On an accumulative basis, term deposits accounted for about 97.6% of the entire deposits during April-December 2023, and the shares of current account and savings account (CASA) deposits went down, said RBI Quarterly BSR-2: Deposits with Scheduled Commercial Banks – December 2023.
Introduction: Dynamics of Depositor Behavior
Recent data from the Reserve Bank of India (RBI) reveals a notable shift in depositor preferences towards term savings plans, driven by the prevailing environment of rising interest rates.
This shift, highlighted in the RBI’s Quarterly BSR-2 report for December 2023, underscores the evolving landscape of banking deposits.
Term Deposits Dominate: Statistical Insights
Term deposits have emerged as the cornerstone of banking deposits, constituting a significant 60.3% of the total in December 2023, compared to 57.2% in March 2023.
The incremental growth in deposits during April-December 2023 was largely fueled by term deposits, accounting for nearly 97.6% of the total inflow, while the share of current account and savings account (CASA) deposits experienced a decline.
Rising Returns Drive Preference
A key driver behind the surge in term deposits is the allure of higher returns.
The share of term deposits offering interest rates exceeding 7% saw a substantial increase, comprising 61.4% of total term deposits in December 2023, a notable surge from 54.7% in the previous quarter and 33.7% in March 2023.
Monetary Policy Dynamics: Repo Rate Stability
The RBI’s monetary policy stance has played a pivotal role in shaping depositor behavior.
With the repo rate maintained at 6.5% since February 2023, the central bank has maintained stability amidst inflationary pressures driven primarily by global factors.
Policy Response to Economic Conditions
In response to evolving economic conditions, particularly inflationary pressures, the RBI’s Monetary Policy Committee implemented significant policy actions.
Commencing with an off-cycle meeting in May 2022, the committee initiated a series of rate hikes, cumulatively raising the repo rate by 250 basis points across five subsequent meetings until February 2023.
Conclusion: Strategic Depositor Optimization
The data underscores the strategic response of depositors to changing interest rate dynamics, with a pronounced shift towards term savings plans offering higher returns.
As individuals seek to maximize their deposit yields amidst a rising rate environment, term deposits have emerged as a favored avenue, reflecting a conscious effort to optimize financial returns in the current economic landscape.
