There was sharp decline in absolute savings in small savings, share and debentures, and currency in FY-12. Marginal growth in life insurance funds (1.2 per cent year-on-year) was also responsible for a fall in financial savings-to-GDP ratio. Even though savings in bank deposits grew by 15 per cent year on year, the deposits-to-GDP ratio was unchanged.

Sustained high inflation and falling real incomes also implied a decline in currency holdings of households (from 1.8 per cent of GDP in FY11 to 1.2 per cent in FY12).

Deviation of savings to gold consumption also cannot be blamed, as gold consumption has seen a significant correction in the last year, with the last data point for the second quarter of calendar 2012 reflecting a 38 per cent year-on-year drop.

We estimate the gross savings-to-GDP ratio to have fallen to 31.4 per cent of GDP in FY12, resulting in the highest ever gap in savings and investment (over 4 per cent of GDP).

What can change in FY13?

While there’s a likelihood of household financial savings recovering in FY13, given a slight moderation in inflation, the impact is unlikely to be material unless there’s a significant improvement in the regulatory environment for the insurance and mutual fund industries.

Private corporate saving may see an up-tick given our call of further rate cuts of 75 basis points by the RBI and our strategy team’s analysis suggesting bottoming out of earnings momentum given the moderation in global commodity prices.

What remains to be seen is to what extent the public authorities’ dis-savings take away whatever small gains accrue on household financial and private corporate savings.

Espirito Santo Securities

Food prices to remain elevated

We believe the moderation in July consumer price index (CPI) inflation — like the fall in July wholesale price index (WPI) inflation — may not be sustainable for the following reasons: One, food prices will likely continue to rise because of poor rainfall during the monsoon season (food comprises 43 per cent of the CPI basket); two, fuel inflation remains suppressed due to an incomplete pass-through of fuel prices to end users, and any hike in administered prices in the coming months will increase inflation.

From a policy perspective, the Reserve Bank of India does not rely solely on this CPI series due to its limited history. However, this is an important input as it reflects inflation faced by households. Today's slight moderation is positive, but CPI inflation is still close to double-digits. We expect all policy rates to remain unchanged for the remainder of 2012 and 50 bps of rate cuts in H1 2013.

Nomura Financial Advisory and Securities (India) Private Ltd

(This article was published on September 1, 2012)
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