Growing retail participation in equity markets may point to flight from bank deposits: SBI

As the Indian economy transcends to a lower interest rate regime, there could be a flight of bank deposits to the equity markets as evident from the increasing participation of retail investors from April 2019, albeit with some volatility, according to State Bank of India's research report EcoWrap.

The report underscored the trend of a relatively lower pace of increase in time deposits, compared to participation of individuals (retail and High Networth Individual) in the NSE cash market.

"We are now in a regime of lower interest rates with the Reserve Bank of India cutting the rates steadily from February 2019 till October 2019. We, however, reiterate that the impact of a declining interest rate regime since 2015 is also being felt by the depositors/ pensioners...

"The falling interest rate regime since 2015 has severely impacted the pensioners, who have lost interest income of Rs 5,845 annually," said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

It is imperative that in a country where less than 5 per cent of the population has access to social security, bank depositors are compensated with a sufficient positive real rate of return and are treated on a par with borrowers too, he added.

Further, considering that there are more than 4 crore pensioners who have average term deposits of Rs 3.34 lakh per account, the net impact on Private Final Consumption Expenditure (PFCE) due to low interest income could be a decline of 30 basis points. One basis point is equal to one-hunderdth of a percentage point.

Ghosh suggested that the Government could provide a tax exemption to the Senior Citizens Savings Scheme (SCSS). This move would have a minimal impact of 2 basis points on the fiscal deficit.

The March 2018 outstanding under SCSS was Rs 38,662 crore. It would be fair if this amount is given full tax rebate as the revenue foregone by the Government could be just Rs 3,092 crore, emphasised Ghosh.

A senior citizen can deposit Rs 15 lakh in SCSS, which offers an interest rate of 8.6 per cent. However, the interest on SCSS is fully taxable, which is a major drawback of the scheme (the interest amount on a Rs 1 lakh deposit for 5 years is around Rs 51,000, which is taxable), the SBI report said.

The structure of term deposits has gradually shifted to lower interest rate buckets in recent years, with individuals’ share of term deposits with interest rates above 8 per cent declining from 82.2 per cent in March 2015 to 11.8 per cent in March 2019, according to RBI data.

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