The Indian economy is witnessing high real interest rates, led by low headline inflation, but this trend’s benefits on financial savings are still far from desired. Although the financial savings rate saw an uptick at 17.2 per cent in FY18, growth is flat compared to the 17.1 per cent savings rate seen in FY 2016-17. It’s also well below the 23.6 and 22.5 per cent witnessed during FY12 and FY13 respectively.
“The decline in household physical savings rate is understandable (possibly flat to down in nominal terms, down as proportion of growing nominal GDP base) but we wonder if the decline in overall savings rate is due to some combination of continued high consumption by households, low job creation in general and increase in financial liabilities of households to support short-term consumption,” noted brokerage Kotak Securities.
Notwithstanding the high real interest rates, household financial savings are moving slow over the past few years. The real interest rate, which is nothing but rates after adjusting for inflation, is currently above 4 per cent. Real rates remained negative in 2012 and 2013, giving savers negative returns on investments, but the situation turned positive in 2014, due to falling inflation.
Traditionally, high real rates should translate to higher financial savings given superior returns, but the rise of alternate asset classes including equities has broadbased growth of financial savings. As on FY18, total household assets stood at $8.4 trillion and grew by 9.3 per cent over the previous fiscal. Of this, physical assets such as property and gold account for 54 and 11 per cent respectively, while financial assets comprise 35 per cent. Although high real rates sound beneficial for financial savings, it affects corporate investments, which in turn impacts consumption, demand and growth. Every 1 per cent increase in real interest rates results in an investment rate drop of 0.5 per cent.