At long last, Indian savers seem to be regaining their lost faith in financial assets. Latest data from the Reserve Bank of India’s annual report show that the gross financial savings of households as a proportion of disposable income, which had stagnated at 10.4 per cent from FY12 to FY14, and dipped to 10 per cent in FY15, recovered to 10.8 per cent in FY16. This small but significant shift from physical to financial assets shows that the RBI’s persistent focus on ensuring a positive real return for savers, by holding its policy rates above retail inflation, may have actually paid off. The Centre’s own actions in actively discouraging gold and real estate investments and retaining high rates on small savings schemes for the last two years, may also have helped. But having worked so hard to get to this inflection point, both the RBI and the Centre may now need to seriously examine how far interest rates can be cut to stimulate the economy, without dis-incentivising the skittish saver.
A few trends within the financial savings data are interesting and merit policy attention. For starters, investors seem to have marginally trimmed their allocations to bank deposits (4.9 per cent in FY15 to 4.7 per cent in FY16), while adding to market-linked products such as shares, bonds and mutual funds (0.4 to 0.7 per cent), small savings (0 to 0.4 per cent) and insurance (1.9 to 2 per cent). This suggests that savers are actively hunting for products that can deliver inflation-beating returns. Given that the Centre has effected sharp cuts in small savings rates in the last six months, their real returns have recently narrowed (especially with CPI inflation at 6.07 per cent). It needs to be seen if this prompts savers to switch back to physical assets. The Centre on its part, should try and retain savers by ensuring that a sufficient number of safe options such as tax-free bonds and sovereign gold bonds are available on tap. Two, record inflows into IPOs, equity mutual funds and the National Pension System suggest returning retail interest in equities. But retail equity flows always pick up during stock market rallies and this time around, regulators should ensure that the buying isn’t driven by a poor understanding of the risks in this asset class.
It is also hard to miss that, despite lower incremental flows, it is bank deposits which continue to garner nearly half of all household financial savings. For long, it has been taken for granted that banks are an ideal conduit because they would automatically redirect retail savings into the most productive sectors of the economy. But with bank credit to industry hardly growing (0.6 per cent growth as of end-July) and bank balance sheets swamped by bad loans, this assumption may now need a rethink. The time may be ripe to dis-intermediate the bond and government security markets, so that retail savers can directly participate in lending to the productive sectors of the economy.