Bank Deposits Creation and Leakages-Comment

Comment D S TWO comments have appeared in January 20 on V G Pendharkar's article on "Bank Deposits in the Indian Economy: Creation and Leakages" (Special Number, August 1967). Of these, the one by G Narayanan raises basically important questions about th- 'asset preferences' of saving units, though his argument, the way it is put, is not quite clear. Narayanan takes exception to Pendharkar's conclusion that the faster increase in deposits with non-banking companies would not affect the level and growth of bank deposits His justification is somewhat as follows: it is true that the amount of bank deposits that will flow to non-banking companies would come back to the commercial banks, via the non-banking companies' transactions, but when non- banking companies spend the amount obtained through deposits, it will give rise to further deposit accretion so that, in the result, aggregate bank deposits would be more than the initial level of bank deposits of the public by the amount of deposits diverted to the non- banking companies. Now, if the pre ference of the public as between currency and deposits remains unchanged, naturally the tendency would be for the public to restore the original ratio through reducing their holdings of deposits with the commercial banks.