India's Deposit Growth Spike Masks Structural Weaknesses In Banking System: Ambit Capital

New Delhi, May 15 (KNN) A sharp jump in bank deposit growth to 13.5 per cent year-on-year (YoY) in March 2026—the highest since the withdrawal of Rs 2,000 notes in June 2023—masks deep structural weaknesses, according to a research note by Ambit Capital.

The Ambit Institutional Equities report, titled “One hike down, more to follow?”, warns that the spike is transitory, driven by precautionary savings and year-end government spending, with average deposit growth for the first eleven months of FY26 at a modest 10.3 per cent.

Why the Spike Is Misleading

The March surge mirrors Covid-era behaviour, when uncertainty pushed households into demand deposits for liquidity rather than long-term savings. 

Fiscal back-loading — the government's tendency to front-load expenditure in the final month of the financial year — amplified the effect, with combined Centre and state spending jumping approximately 14 per cent YoY in February 2026 after near-stagnant growth of 1.7 per cent in the preceding months. 

The Reserve Bank of India (RBI) open market purchases of Rs 1.7 trillion across February and March added further to systemic liquidity.

Four Structural Headwinds

Ambit identifies four persistent forces undermining deposit growth. First, National Savings Schemes offer a 120–250 basis point rate advantage over bank deposits and have been insulated from the RBI's 125 basis points of repo rate cuts since February 2025, diverting household savings away from banks. Equities compound this trend — households' share of financial assets held in deposits fell from 58 per cent in FY12 to 35 per cent by FY25, while equities and mutual funds rose from 2 per cent to 15 per cent.

Second, net foreign investment flows have swung from an average inflow of USD 37 billion annually during 2015–2023 to an outflow of roughly USD 5 billion per month since January 2023, directly draining rupee liquidity. 

Third, the rise of Unified Payments Interface (UPI) and high-velocity digital payments has broken the traditional credit-deposit cycle — the correlation between credit and deposit growth has collapsed from 72 per cent pre-UPI to just 11 per cent today. 

Fourth, the government's Just-in-Time expenditure policy has eliminated the float that previously kept public funds parked in commercial banks, holding government deposit growth to a two-year Compound Annual Growth Rate (CAGR) of just 4.5 per cent against 10.7 per cent for the broader system. Rising cash in circulation — up 12 per cent YoY — further drains liquidity from the formal banking system.

Banks Under Funding Pressure

With retail deposits structurally constrained, banks are increasingly relying on Certificates of Deposit — which grew at a 28 per cent three-year CAGR to Rs 41.3 trillion in FY26 — despite being approximately 130 basis points costlier than retail deposits. 

State Bank of India (SBI) raised Rs 250 billion via Qualified Institutional Placements in FY26, while Bank of Baroda (BoB) tapped Rs 100 billion in green infrastructure bonds. 

Banks' excess Statutory Liquidity Ratio (SLR) buffer has also shrunk from around 8 per cent to 6.3 per cent of Net Demand and Time Liabilities, leaving limited room to fund credit growth by selling government securities.

Potential Relief and Long-Term Fix

The 8th Pay Commission, if implemented at the start of FY28, could inject an estimated Rs 4.8 trillion into the system — including Rs 2.7 trillion in arrears — benefiting public sector banks, particularly SBI, Indian Bank, and Canara Bank. 

Over the longer term, Ambit argues that India's near-total reliance on deposits for 99 per cent of bank balance sheet funding — versus 65–70 per cent in Western economies — makes expanding loan securitisation essential, though the market remains vastly underdeveloped with less than 1 per cent of FY26's Rs 31 trillion in credit disbursements securitised.

(KNN Bureau)