Interest sensitiveness of deposits in India

Abstract

On the assumption that both demand and supply play a role in determining the price and quantity of the commodity in question, a study of interest sensitiveness of deposits must consider both the demand and the supply of deposits. Deposits may he said to be supplied by banks and demanded by the nonbank private sector. Since, in India, banks always honour deposits and deposits constitute by fur the major source of funds through which banks make profit, and since depositors merely choose between different kinds of deposits by their liquidity/saving motives in the belief that they have no influence on the interest rate, it is assumed here that banks determine the interest rate and terms and conditions on deposits, and on these terms they then supply art unlimited quantity of deposits to meet the demand from depositors. The hypothesis is that at a given interest rate depositors demand a given amount of deposits and that their demand varies with the variation on the interest rate on deposits. This paper sets out to find out, by estimating demand functions for deposits, the interest sensitiveness of deposits in India. It posits that there is in fact a significant positive correlation between the two.