The resilience shown by India’s capital markets in the post-Covid era has been remarkable. They have stood firm in the middle of uncertain, and often unfavourable, global and domestic macroeconomic conditions. Increased retail participation, both directly and through mutual funds, has changed the DNA of Indian markets. There is every reason to celebrate the opening of over 100 million demat accounts, around 60% of them opening in the last two-and-a-half years.
Though we have a long way to go as compared to developed markets — adult population participation in capital markets in India is still only around 7%, compared to 70% in the US and 20% in China — it is an excellent beginning. It is in the interest of all stakeholders to keep this momentum going.
Excess liquidity, low interest rates and lack of alternative investment opportunities during 2021-22 have been factors pushing retail investors to capital markets. What may have not been adequately highlighted is the robust, dependable and efficient equities market regulatory framework that has provided confidence to retail investors. The ease of investing and increased digitisation of processes further facilitated this. That said, bringing in improvements is a continuous process.
Traditionally, the Indian financial sector has been dominated by banks. Increased domestic investor participation in markets have affected bank deposits. The fact that real returns from bank deposits have been negative during the last two-and-a-half years hasn’t helped banks. Having tested the waters in markets, investors are now better aware of available alternative investment opportunities.
Whenever RBI has increased the repo rate in the past, banks have been quick to raise their lending rates but sticky in increasing deposit rates, a typical monopolistic/oligopolistic behaviour. More than required liquidity in the system in the recent past also helped banks to keep deposit rates repressed. Now that the liquidity is being normalised, taking depositors for granted is not working.
Banks are being forced to increase deposit rates to compete with other alternative investment opportunities.
The increased credit demand on account of revival in domestic economic activity, working capital requirements and rising discretionary spending has further pushed the banks to vie for deposits. Loans increased year-on-year by 16% in September 2022, compared to 9.6% during FY2022 and 4.6% during FY2021. The incremental credit-deposit ratio this year has increased to a 9-year high of 112%, compared to an average of about 70% during the five-year preCovid period. Also, many banks have resorted to raising money from the market through bonds and corporate deposits.
All this has resulted in the disciplining of banks by increasing competition in deposit rate-setting, reducing operational opaqueness and rationalising their spread. If you happen to be a not-so market savvy senior citizen dependent on your savings for income flow, or a pensioner with no inflation indexation of pension, next time your bank raises deposit rate, thank the market, not the bank.
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