Household savings on the rise

Household savings on the rise

The Reserve Bank of India’s latest annual report took note of a positive turn in the performance of the economy in terms of some key economic indicators, but much of this good news has been in the public realm.

It is the RBI view of the indicators and that is deemed important. Three important observations were that economic growth has improved and inflation is down, though not under complete control, and that banks have not passed on the cut in interest rates to customers. These have been described as areas where work is in progress. The apex bank is also concerned over the slow movement in the resolution of the problem of distressed assets of banks and wants more action on recapitalisation of banks. These issues may expectedly decide the RBI’s priorities in the near future.

But the report also made one observation which has not received much attention, and that is about the increase in the financial savings of households. These savings show a welcome change from the past five years. The report says that the financial savings rate increased from 7.3 per cent of the national income in 2013-14 to 7.5 per cent in 2014-15. At the same time, there is also a shift in the composition of household savings away from real estate and gold. This is a promising trend and may have been caused by the fall in inflation in the past one year. When inflation is strong, real estate and gold are used to hedge it. Both may have become less attractive with inflation declining from double digit levels to about 5-6 per cent. The turn away from these investment avenues is good for the economy as they are largely unproductive. Investment in gold is especially counter-productive as it requires imports, which exert negative pressure on the current accounts deficit situation.

The nature of financial savings is also worth noting. Bank deposits showed only a modest growth and the major gain was in investment in securities and the stock market. The period also coincided with the good performance of the stock market. Investment of individuals in the stock market through direct purchase of shares and mutual funds has shown a remarkable increase. A large number of new investors were also attracted to the stock market. It is too early to say if this marks a change in the investment habits of individuals and families. It may be a good augury because such savings can give a boost to the economy. But it also calls for greater regulatory checks and supervision of the stock market.

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