Household savings get a DeMo boost

The November demonetization has nudged Indian households to park more of their savings in financial assets, with cash holdings turning negative after the currencyswap was announced.

The share of deposits as a percentage of Gross National Domestic Income (GNDI) has risen by more than 50 per cent despite the dip in returns, while that of higher-end investment products such as stocks and mutual funds have more than doubled.

According to the preliminary estimates released by the Reserve Bank of India (RBI), household financial savings rate increased 8.1 per cent of GNDI in 2016-17 from 7.8 per cent a year ago. The savings were stagnant at 7.2 per cent of GDNI between FY'12 and FY'15 ­ largely through the UPA-II regime. The majority of the savings continued to be parked in deposits, mostly banks, and to an extent in instruments issued by large corporate and NBFCs, accounting for 8.3 per cent of GNDI in FY'17. The GNDI at current prices is estimated at Rs 153.8 lakh cr for FY17.



Contrary to popular perception, household savings in deposits were up 52 per cent from 4.8 per cent a year ago, despite a fall in returns by over 100 bps (one bps is 0.01 per cent) during the year. Market analysts attribute it to a sharp surge in cash and currency in the system get ting converted as deposits within the banking system. It is estimated that more than Rs 3 lakh crore of cash had been converted into deposits, according to a recent report by the research team at the State Bank of India.

Stocks and debentures also got more subscriptions, with their share rising from 0.3 per cent of GDP to 1.2 per cent of GDP , with many traditional investors in bank deposits shifting to equity and market-linked instruments.

“Higher financial savings were mainly supported by lower inflationary scenario as also portfolio adjustment from physical to financial assets by households,“ the Reserve Bank of India explained in its latest annual report.