Markets
Booming stocks push banks into FOMO zone
Summary
India's booming stock market is luring investors away from traditional bank deposits, creating a funding headache for banks. While deposit growth lags credit demand, the narrowing gap between lending and deposit rates offers a glimmer of hope for improved liquidity.India’s surging stock markets are giving bankers sleepless nights, as the allure of equities outshines returns on deposits. Investors, enticed by higher yields, are shifting from traditional bank savings to riskier equity investments. This trend, which gained momentum after the pandemic-induced market rebound, highlights a growing preference for equities over safer bank deposits.
But as the transmission to banks’ lending and deposit rates improve, the spread between deposit and lending rates is narrowing. Despite this, the growth in deposits hasn't kept pace with borrowing, compelling banks to explore alternative funding sources. The key question remains: Will this struggle intensify, or is relief on the horizon?
Equities are all the rage
One telling metric that reveals the growing risk appetite for equities over bank savings is the ratio of market valuation levels to bank deposits. In June, the combined market value of BSE 500 firms reached 1.87 times the aggregate bank deposits, the highest level since the peak of the 2007 bull run, and it continues to inch closer to that record. This is playing out against the backdrop of burgeoning investor activity.
Lucrative returns
The shift is driven by impressive returns from equities, which have led to handsome rewards for investors. Not only the frontline share indices, but the broader market, too, has delivered sparkling returns in the past six months. With investments also flowing towards indirect channels, equity mutual funds’ assets under management have soared during this period.
Pandemic shifts
With the advent of the covid-19 pandemic in 2020, investors were initially drawn towards safe assets such as bank deposits as uncertainty surrounded the markets, but gradually, a love affair bloomed and investors started exploiting stock markets to the hilt.
Smoother transmission
In the initial leg of monetary policy tightening by the central bank in 2022-23, banks were slow in passing on the interest rate hikes to deposits. This, too, pushed savers to let go of their risk-off sentiment and take a punt on equities. However, the gap between lending and deposit rates has been narrowing now and of late, incremental deposits have overtaken credit offtake.
Growth worries persist
Still, concerns hover around the growth in deposits, which is moving at a slow pace, consistently falling behind the growth in borrowings. This growing gap between the two is also reflected in a rising credit-deposit ratio, even if one excludes the impact of HDFC’s merger with HDFC Bank.
