Ashish Gupta has authored a thought provoking note titled "Households don’t create deposits, banks do”.
This counter-intuitive note points out that deposit growth is actually spurred more by banks lending more than by households putting their savings into FDs – a point that is very relevant in today’s narrative that suggests that households moving more savings into mutual funds is negatively impacting our banking system.
Households that either spend or save their earnings are only participating in money transfers. But when a bank lends on the basis of a deposit received, it creates another deposit – in the account of the borrower – a concept that economists refer to as velocity of money.
As RBI progresses from restrictive to accommodative monetary policy stance, expect more liquidity in the system, which will in turn give more headroom for banks to lend – and thus fuel deposit growth too.
Ashish expects a shallow rate cut cycle in India of no more than 50 basis points spread over an extended period time period. NBFCs with fixed rate loans are likely to benefit from this cycle.
As regards stock market performance of banks, he acknowledges the cyclical slowdown in earnings growth due to NIMs topping out and says that in fact with a rate cut cycle, there can be more pressure on NIMs. Some banks will continue to gain volumes and grow earnings at a good clip while others may struggle to grow earnings this year.