As seen in the past few months, growth of sight deposits again far outweighed term deposits in the month to Dec.20, the Central Bank of Iran reported.
Also known as time deposits, total term deposits reached 25,129.9 trillion rials ($104.7 billion) by Dec 20 -- 32.3% higher compared to the same period in 2019. In the course of nine months from the beginning of the current fiscal year last March, the deposits increased 22.9%.
Total sight deposits amounted to 5,528.1 ($23b) in the month, registering a whopping 77.9% growth on annualized basis. Sight deposits rose 1,866.5 trillion ($7.7b) in the nine months to log 51% growth, the CBI said in a report.
While growth in sight deposits slightly slowed compared to the 90.7% annual growth in the previous report (covering the month to Sept. 21), the speed with which sight deposits grow, as compared to pace of term deposits growth, is still a concern as the "hot money" may continue to pose a threat to the stability of financial markets.
The fact that sight deposits outpaced long-term deposits clearly 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. It is also seen as a sign that long-term deposits are losing traction to sight deposits as the latter is readily accessible to depositors.
Composition of Money Supply
The unwillingness to keep money in banks for long periods is also visible in changes in the composition of broad money supply, which reached 31,300.2 trillion ($130b) at the end of third quarter of the current fiscal year on Dec. 20, indicating 38.4% Y/Y growth.
As for the main components of money supply, the CBI said the share of money (M1) stood at 6,170 trillion rials (25.7b) by Dec. 20 or 69.8% higher compared to the same period last year. M1 grew 44.4% in nine months.
The total value of banknotes and coins in circulation was 642.2 trillion rials ($2.6b) by Dec. 20 -- 21.7% higher compared to the same period last year.
Quasi-money (M2) grew at a slower pace compared to M1 and was over 25,129.9 trillion rials ($104.7b) to post 32.3% growth on an annualized basis.
M1 is composed of physical currency and coins, demand deposits, travelers' checks, other checkable deposits and negotiable order of withdrawal (NOW) accounts. M2, also called near-money, refers to less liquid assets that can be quickly exchanged for cash. Examples are bank certificates of deposit and treasury bills.
The contribution of M1 to money supply increased from 17.3% in March 2020 to 19.7% in December. The share of M2 declined from 82.7% to 80.3% in December, raising fresh concerns about shorter periods money is parked in long-term bank accounts and the flow of liquidity into markets ultimately pushing up consumer price inflation.
Juxtaposing the current data with numbers released at the end of H1, however, indicates that the contribution of M1 to money supply dropped by 1 percentage points, which could bode well for stability of financial markets in the months to come.
Low Interest Rates
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 2020 followed by the unsurprising exodus to the currency and gold markets.
The central bank has come under mounting criticism for its reluctance to raise interest rates, which observers blame for decline of term deposits.
Despite calls for raising interest rates, it seems the CBI policymakers are in a quandary given its impact on the capital market and sensitivity of the stock market to any moves.
The CBI argues that raising interest rates could lead to capital outflow from the bourse to banks, which apparently increase the cost of money for banks, many of which are already grappling with weak balance sheets.
In a talk on state TV earlier in the week, the CBI governor Abdolnasser Hemmati said the regulator has no plans to raise deposit rates in the near future.
He spoke about a decision to lower interbank bank rates to 18% from the present 20%, which is seen as a move that also could drag down deposit rates in the mid-term.
