Another 'Catch-22' situation for Indian economy

Over the last 10 years, spread of commercial bank (including State Bank of India) deposit rates and lending rates in India has increased approximately by 175 basis points

The spread was 225 basis points in 1997-98 which increased to 525 basis points in 2002-03 and 2003-04 to 400 basis points in 2006-07.


Source-RBI

Notable point is that deposit rates are for more than 5 yr deposits which offer higher rates. In India, a large amount of deposits are short term deposits (less than 5 yr) and this divergence is even more for short term deposits. Given the fact that commercial loans in India (as a % of deposits) is among the lowest in the world, Indian regulatory authorities can find themselves in a 'Catch 22' situation where lending rate softening will increase the domestic consumption and keeping the spread intact will attract foreign investors

India will have to seek a trade-off keeping in mind the interests of domestic consumers and foreign investors