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RBI’s annual reports—the 2007-08 edition is just out—make for most interesting reading in its sections on household savings trends. This report’s findings are interesting in both a worrying and satisfying sort of way. The good thing is that household savings in shares and debentures—this is an indication of ordinary people’s participation in stock markets—is up by a huge 51.2%, the highest increase across all segments. Clearly, the stock market bull run in much of the period for which data was gathered had a big impact on household investment decisions. Household savings invested in the capital market at the end of the last fiscal year was at 1.6% of GDP, a five-fold increase over three years. What impact the capital market bear phase has on this in 2008-09 will be interesting to watch as would be the extent to which small investors come back once the market recovers. For now, though, there’s enough excuse to wonder whether Indian households are shedding some of their conservatism. The worrying trend is whether there are wrong kinds of incentives to shed conservatism. It is one thing when households invest in shares because of financial maturity. It is another matter when the financial system is not deep enough and its incentives not powerful enough to over-disincentivise bank deposits.
The report shows that not only have net household financial savings fallen, at 11.2% of GDP, they are at the lowest in three years. Also, for the first time in 12 years, household financial savings have fallen in absolute terms. Household savings in bank deposits fell by 2.6% in absolute terms; in provident and pension funds, the fall was a big 15.2%—the biggest in more than 20 years—and small savings saw an outflow of almost Rs 13,000 crore; in 2006-07, there was an inflow of nearly Rs 39,000 crore. Apart from stock markets, households parked more money in non-banking finance companies (an 11.4% increase) and insurance (12.2% increase). Clearly, the banking system needs to come up to speed with market forces. The regulation of savings deposit rates doesn’t help. Neither does the fact that India is actually underbanked—not even 50 major banks in a country where estimates say around 600 million people can have bank accounts. The biggest lesson from this is for the report’s author: RBI.
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