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Since May, India’s monetary data has undergone a remarkable transformation. Two of the
important changes include a shift in the composition of bank deposits from demand to time
deposits and a decline in currency holdings of the public. Considered together, the data
implies that monetary tightening is now adversely feeding through domestic demand and
asset prices. Households are stepping up savings. At the same time, these developments
may still not be adequate to take pressure off bond yields.
Growth in demand deposits had been slowing since the start of 2011. From May, they started
to decline. Time deposits have on the other hand, been accelerating. In economics terms,
this implies a falling ‘speculative’ motive for holding money i.e. diminished appetite for risky
assets.
The other development has been a slowdown in ‘currency held by the public’. A component
of M1, ‘currency held by the public’ has been a very reliable gauge of transactions demand
(consumption) in cash based economy like India. The slowdown in this metric has gradual
but nonetheless, is symptomatic of slowing demand. The deceleration is also consistent with
other indicators of consumption such as auto sales. As evident from Figure 2 below, auto
sales have also been slowing since May
Considered in totality, demand deposit and currency data suggest that monetary tightening has
reduced the opportunity cost of idle cash. The monetary tightening cycle is being transmitted
through domestic demand. Inflation remains at uncomfortable levels but should start to ease
meaningfully in the coming months. If it does remain elevated, it will be because of non-monetary
reasons.
Now as mentioned earlier, time deposits have accelerated. Although once again confirming
slowing growth, the rise in time deposits is supportive of the government borrowing programme.
This should be all the more the case given that bank lending is moderating, thereby creating
surplus liquidity for banks.
Nonetheless, whether the surplus liquidity will be sufficient or not and whether it will result in
lower bond yields is unclear. We think that barring support from open market operations and/or a
reduction in the cash reserve ratio, a decline in yields is unlikely for the following reasons.
The government has upsized its H2 FY12 (October 2011 to March 2012) borrowing programme
to INR2.2trn from a budgeted amount of INR1.67trn. This is a 13% increase. In level terms, this is
the highest issuance in the second half of any fiscal year in the last five years.
The investment to deposit ratio is already well above the statutory requirement of 24%.
Banks remain short on liquidity. Daily net reverse repo numbers remain negative, even though
the extent of recourse has dipped slightly.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Since May, India’s monetary data has undergone a remarkable transformation. Two of the
important changes include a shift in the composition of bank deposits from demand to time
deposits and a decline in currency holdings of the public. Considered together, the data
implies that monetary tightening is now adversely feeding through domestic demand and
asset prices. Households are stepping up savings. At the same time, these developments
may still not be adequate to take pressure off bond yields.
Growth in demand deposits had been slowing since the start of 2011. From May, they started
to decline. Time deposits have on the other hand, been accelerating. In economics terms,
this implies a falling ‘speculative’ motive for holding money i.e. diminished appetite for risky
assets.
The other development has been a slowdown in ‘currency held by the public’. A component
of M1, ‘currency held by the public’ has been a very reliable gauge of transactions demand
(consumption) in cash based economy like India. The slowdown in this metric has gradual
but nonetheless, is symptomatic of slowing demand. The deceleration is also consistent with
other indicators of consumption such as auto sales. As evident from Figure 2 below, auto
sales have also been slowing since May
Considered in totality, demand deposit and currency data suggest that monetary tightening has
reduced the opportunity cost of idle cash. The monetary tightening cycle is being transmitted
through domestic demand. Inflation remains at uncomfortable levels but should start to ease
meaningfully in the coming months. If it does remain elevated, it will be because of non-monetary
reasons.
Now as mentioned earlier, time deposits have accelerated. Although once again confirming
slowing growth, the rise in time deposits is supportive of the government borrowing programme.
This should be all the more the case given that bank lending is moderating, thereby creating
surplus liquidity for banks.
Nonetheless, whether the surplus liquidity will be sufficient or not and whether it will result in
lower bond yields is unclear. We think that barring support from open market operations and/or a
reduction in the cash reserve ratio, a decline in yields is unlikely for the following reasons.
The government has upsized its H2 FY12 (October 2011 to March 2012) borrowing programme
to INR2.2trn from a budgeted amount of INR1.67trn. This is a 13% increase. In level terms, this is
the highest issuance in the second half of any fiscal year in the last five years.
The investment to deposit ratio is already well above the statutory requirement of 24%.
Banks remain short on liquidity. Daily net reverse repo numbers remain negative, even though
the extent of recourse has dipped slightly.
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