With money supply expanding at tremendous speed the growth of sight deposits in banks far outpaced term deposits in the first six months of current fiscal year (March 20- Sept.21)
This reflects the people’s reluctance to keep money in banks for extended periods as they expect prices to rise higher than the interest banks offer.
Total sight deposits rose by 2,572.5 trillion rials ($8.7 billion) in the period ending Sept. 21 to reach 5,407.4 trillion rials ($18.6b) -- a whopping 90.7% annualized growth. Sight deposits rose 47.7% during the six months, according to a CBI monthly report seen on its website.
This is while term deposits had a slower pace and registered 28% annual growth reaching 22,951.9 trillion rials ($79b). Term deposits posted 12.2% growth in H1.
Long term deposits were at 12,082 trillion rials ($41.6b) by Sept.21, registering 18% growth annually and up 5.2% in H1. Short-term deposits rose to 8,641.3 trillion rials ($29.5b), up 39.2% annually and 22% during H1.
Likewise, the total amount of Qarzol-Hassaneh (interest-free) deposits increased 51% in the year to Sept. 21, reaching 1,705.3 trillion rials indicating 17.8% growth in H1.
The fact that sight deposits far outpaced long-term deposits is seen as a signal that long-term deposits are losing traction to sight deposits. Sight deposits are readily accessible to depositors understandably anxious about the rapid devaluation of their hard-earned savings under mounting inflation.
Bigger M1 Share
Investors’ aversion to keep money in banks for long periods is also visible in change in the composition of broad money supply.
Broad money supply reached 28,958.9 trillion rials ($107b) at the end of the H1, up 36.2% compared to the same period last year.
The share of money (M1) was 6,007 trillion rials ($22.2b) by Sept. 21 -- up 80.2% year-on-year. M1 declined 40.6% in H1.
M1 refers to highly liquid assets, including physical currency and coins, demand deposits, traveler checks, other checkable deposits and negotiable order of withdrawal (NOW) accounts.
M1 contributed to 20.7% of the total money supply in H1, the highest in the past seven years. The figure was 17.3% at the end of last fiscal year on March 19.
On the flip side, the share of quasi-money, or M2, in money supply declined from 82.7% in mid-March to 79.3% in H1.
Financial experts and market observers say that steep volatility in financial markets is one consequence of the increase in sight deposits seen in the excessive inflow of liquidity into the stock market during March-August followed by the unsurprising exodus to the currency and gold market.
The fact of the matter is that people are moving to other financial markets in pursuit of higher returns. Observers link the declining traction of term deposits largely to the CBI’s expansionary policy to reduce the cost of money to banks and encourage the people to invest in manufactures.
Financial experts warn that CBI delays in embracing contractionary policies could lead to bigger amounts of long-term deposits turning into sight deposits. This is raising serious concern that financial markets could face new price shocks due to the ballooning money supply.
Higher Interest Rates Ineffective
Despite calls for raising interest rates, the Central Bank of Iran is unsure about the feasibility of the option. In late October, the CBI Governor Abdolnasser Hemmati said the bank has no plan to increase deposit rates.
"Raising deposit rates is unlikely to deliver in light of the supply crunch [in the currency market], banks’ poor balance sheets and the government’s increasing demand for funds. Under the circumstances the CBI would do better to reduce inflation by using other methods," he said in a note on his Instagram account.
Back in July, the Money and Credit Council, the top monetary regulatory body, raised interest rates slightly. But the tweaks were insignificant and failed to entice depositors.
The MCC decided in mid-July to raise interest on one-year maturity deposits by 1 percentage point to 16%. Likewise, interest on two-year deposits was set at 18%. On short-term deposits with 3-month maturity, the rate increased by 2 percentage points to 12%. It approved 14% interest for six-month deposits, up 3 percentage points.
Latest data released by the Statistical Center of Iran show consumer inflation in the month ending Oct. 21 increased 41.4% compared to the similar month of the previous Iranian year.
As long as high inflation persists, returns on gold and forex outpace the paltry bank interest rates while the rial loses value as never before, moving money out of banks to safe havens can best be defined as the demand of wisdom.
