The country's largest lender SBI said that the added liquidity that was flowing into the banking system after demonetisation might pull down interest rates further. A huge amount of money is flowing into both the savings and current accounts. The huge amount of deposits has turned the system liquidity into surplus.
SBI's cash deposits have swollen by over Rs.1.27 lac cr as people are compelled to put their money in bank accounts because of invalidity of high-denomination currencies and the note exchange policy. SBI expects inflation in Nov to slip below 4%. In Oct, retail inflation was at 4.20% while wholesale inflation eased to 3.39%. In its last monetary policy in Oct, RBI had cut the key repo rate by 0.25% to 6.25%. RBI has cut repo by 1.75% since January 2015. Meanwhile, SBI share price was trading 1.92 per cent lower on the NSE.
SBI trimmed fixed deposit rates on select maturities by up to 0.15% last week on account of cash flush because of invalidity of high-value notes. SBI said that these funds would be invested in reverse repo and T-Bills in the short-term.
An SBI official informed that the funds would subsequently get deployed as CP or commercial paper and for addressing credit requirements of customers.
SBI said the deposits coming into the banking system can be used for further lending that can help in GDP growth via the credit multiplier effect. However, the banking system would have to bear the additional cost in the short term which would come from the increased operational costs in handling the cash that is flowing into banking channels.
SBI further added that RBI would have to bear additional cost of printing novel notes. It concluded that once the initial glitches were smoothed, it would lead to a less-cash, transparent society.
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