Over the last two years, I've been hearing this argument a lot: that bank deposits are slowing because people are putting more money into mutual funds and the stock market. Since several senior bank executives have said this publicly, it has become gospel. I worry that tomorrow, some finfluencer will use this "truth" in a catchy reel and trigger unnecessary panic. So let's clear the air.
In modern banking, money doesn't stop being a deposit just because it moves into the stock market. If you invest FD money in shares, it first sits in your broker's bank account - usually a current account. When a trade happens, it moves to the seller's broker or their own bank account. Either way, it remains a deposit somewhere in the system-unless someone actually withdraws cash.
The Accounting Identity That Explains Everything
The RBI publishes M3 - broad money - broken down from two perspectives: components and sources. Both sides of this equation are identical in value.
The components consist of:
- Currency with the public (physical notes and coins held outside the banking system),
- Demand deposits with banks (current and savings account balances),
- Time deposits with banks (fixed and recurring deposits), and
- Other deposits with the RBI (minor balances held directly at the central bank).
The sources consist of:
- Net bank credit to the government (loans and bond purchases made by the RBI and banks that fund government spending),
- Bank credit to the commercial sector (loans given by banks to companies and households),
- Net foreign exchange assets of the banking sector (foreign currency flows),
- The government's currency liabilities to the public (coins and small currency issued by the government), and
- Subtracted from the above are the banking sector's net non-monetary liabilities (capital, provisions, reserves, and other balance-sheet items that absorb money but do not circulate as deposits).
After some math, we can derive an equation for deposits:
Deposits = Net Credit to Government + Credit to Commercial Sector + Net FX Assets − Net Non-Monetary Liabilities − Currency with Public
In simple terms, deposits increase when banks lend more, foreign funds flow in, or less money is withdrawn. They decline when credit growth slows, forex inflows decrease, banks reserve more funds, or people hold more cash outside banks.
Snapshot
As of 15 January 2026, Indian banks held about Rs 255 lakh crore in deposits. Annual deposit addition was Rs 14 lakh crore in FY22, Rs 16 lakh crore in FY23, Rs 24 lakh crore in FY24, Rs 21 lakh crore in FY25, and Rs 20 lakh crore up to mid-January FY26. The chart below shows the decomposition of the incremental deposits.
How Bank Credit Drives the Deposits?
The most important driver is bank credit. Banks don't use existing deposits to lend. It creates loans and opens a matching deposit - that's how new deposits are created.
In FY24, commercial credit grew by Rs 28 lakh crore, boosting deposits. The credit impulse has since eased, with additions around Rs 19 lakh crore in FY25 and FY26, steady but not accelerating. Lower incremental credit has led to slower addition of deposits.
Impact of Government Flows & Foreign Exchange
Between FY23 and FY25, credit to the government boosted deposits as bank lending or bond purchases led to higher spending. Now, this support has diminished, contributing to lower deposit growth.
When dollars enter India, and the RBI buys them, rupee liquidity is created, and deposits rise. This channel lifted deposits, especially in FY24, when it touched Rs. 7 lakh crore, up from just Rs 1 lakh crore in FY23. In FY26, it has moderated, adding pressure on new deposit creation.
Impact of Cash Withdrawals & Bank Balance Sheet Items
Now to the leakages. Cash withdrawals drain deposits steadily, around Rs 2–3 lakh crore a year. Not much has changed in this factor.
Next, net non-monetary liabilities. When banks retain profits or build buffers, that money does not come back as deposits. In FY23 and FY24, this drag was overwhelmed by strong credit growth. More recently, even though this absorption has eased, which could have supported higher deposit addition, slower credit growth has played a bigger role in pulling deposit growth down.
Final Take
Put together, the story is simple: credit creates deposits. Deposits peaked in FY24 due to booming credit and strong FX inflows. They slowed in FY25 and remained steady in FY26 because those factors weakened. Seeing it as a competition with mutual funds and stock markets misses this part of the story. Slower deposit growth is the symptom, not the cause.
Some bankers have even suggested raising deposit rates to increase deposit growth. That may help at the margins, but it won't change the mechanics underneath. It's like rubbing Zandu Balm for the cold: some relief, but no cure from the air pollution that messes with our respiratory system.
ALSO READ: RBI Drafts Norms For Banks To Report Offshore Rupee Forex Trades
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