The Reserve Bank of India (RBI) left key borrowing rates unchanged last week. That means your loans are likely to remain cheap, and fixed deposits continue to fetch a lower interest rate.
The RBI annual report shows that time deposits have grown at nearly 11 per cent in the year to March 2021.
That is the money lying in bank fixed deposits at an aggregate of Rs 160 lakh crore. It is the fastest rate at which fixed deposits have grown. It is reasonable to assume that most of the money belongs to corporates. However, the rate is much higher among households, too.
Broadly, that means you continue to conserve a lot of money. You are saving money for an eventuality considering the uncertainty that lies ahead. The desperation to conserve cash is such that it is happening at a time when interest rates have gone down lower and lower over the past two years.
The RBI attributes the surge in time deposits to depositors’ risk-averse attitude and lack of other avenues. While avenues are limited for corporates due to restrictions on the way they invest surplus funds, individuals have to put idle money to use.
Over the past two years, Sensex and Nifty, the two benchmark equity indices, have been on an upward trajectory. The risk-averse strategy followed by households could include stopping the systematic investment plans in equity mutual funds.
That could also include not investing further in equity markets or pulling money out. The conservative approach of households with surplus cash means that they have not put their money to work.
Money in fixed deposits is not an investment. It is keeping it idle. When you invest regularly, you can channelise it for future growth. Investing in equity is risky when you have financial uncertainty ahead of you.
There is that fear of the unknown. However, if you have surplus cash in the bank, a portion of that has to be put into assets that would do better than the average inflation rate in the economy. Your fixed deposits are barely covering for inflation. That means your money loses value over time.
You may think that you would resume investing once your income grows. However, there is no likelihood of businesses paying employees more than before.
A study by McKinsey Global Institute of large companies in rich countries highlights that corporate profitability does not translate into a higher household income.
The institute put a map of the way money finds itself to households. It collected data for productivity and growth in wages for two periods between 1994 and 1996 and 2016 and 2018.
The headline from that research was that productivity gains were at 25 per cent, and wages grew only by 11 per cent, meaning higher profits did not translate into higher wages for employees. Instead, companies rewarded shareholders with dividends and more.
Being an investor in equity assets is crucial besides being an employee in a good company. You may not want to allocate a large quantity of your savings to equity assets. Even a portion allocated to equity assets is good enough for beating inflation.
This column has consistently argued against keeping the money idle. Young people should invest regularly and do it to beat inflation in the economy.
If you are already investing regularly, you must continue to do so. If you are not sure about prospects ahead, you must have a conversation with your financial advisor. In times of uncertainty, getting the right financial advice matters.
You may have a lot of money conversations with people you know are well-versed.
However, a structured discussion on your options with a professional is essential. A lot of financial advisors would recommend a conservative approach to put your money to work.
They would ask you to tread with caution and allocate a small portion to equity assets.The dilemma for you would be about the timing. You may wonder about the steam left in equity markets after gaining so much over the past year.
(The author is editor-in-chief at www.moneyminute.in)