India Macro : On why deposits are bottoming out:: Bank of America Merrill Lynch

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India Macro Weekly
On why deposits are bottoming
out
􀂄 Focus: On why deposits are bottoming out
We grow more confident of our June call of deposits bottoming out in September.
Deposit growth should pick up to 17.5% by March from 14.3% in September.
Nonetheless, we still expect lending rates to go up another 50bp in the busy
season with 20% loan demand. Why are deposits bottoming? Because base
effects are done. Second, the RBI will likely inject US$25bn of liquidity with
inflation coming off. Given that our US economists expect the Fed to launch QE-II
on November 3, we reckon that the RBI should be able to buy US$11bn of fx by
March 11. Third, public demand for pocket money should come off as inflation
recedes. Finally, rising deposit rates should raise the attraction of bank deposits.
17.5% deposit growth + 20% loan demand = 50bp rate hike
We continue to expect lending rates to go up by another 50bp in the October-
March busy season. This assumes 20% credit growth. Our BofA ML liquidity
model estimates that banks will face an excess loan demand of 8.6% of deposits
even if deposit growth scales back up to 17.5% as we expect. In fact, SBI hiked
prime lending rates 25bp yesterday, over and above August’s 50bp.
#1. RBI to inject US$25bn of liquidity to fund loan demand
We expect the RBI to inject US$25bn of liquidity by March 11 to meet excess loan
demand. Its 100bp CRR hike has pulled money growth down to far too tight 15%
levels to fund 8.5% growth. Second, the RBI should have greater headroom in
stepping up liquidity as inflation comes off. Finally, the RBI, naturally, would like to
buy fx and build up fx reserves rather than gilts and ‘monetize’ the fiscal deficit.
Given that our US economists expect the Fed to launch QE-II on November 3, we
reckon the RBI should be able to buy US$11bn. It also just announced “buyback”
of gilts maturing till February to “prepone” inflows into the money market.
#2. Lower inflation = lower pocket money = higher deposits
We expect public transactions demand for pocket money to come off as inflation
ebbs. High inflation typically leads to a drawdown of bank balances as the public
requires more cash for day-to-day transactions. Lower inflation will reduce the
preference for cash, pull down the cash deposit ratio and add to deposits.
#3: Higher deposit rates to attract household savings
We expect higher bank deposit rates to attract deposit flows from household
savings. Bank deposit rates have gone up 50bp since our June report. All said
and done, this will not be as important a factor as the previous two because the
hemorrhage to postal savings – that is a primary alternative to bank deposits - has
really been limited to Rs300bn a year (0.6% of outstanding bank deposits).
Week ahead: All eyes on September results
We expect markets to focus on on-going September results. Our India strategist,
Jyoti Jaipuria, expects Sensex companies to report 45.2% profit growth