Mumbai: India’s benchmark equity index, the Sensex, has fallen about 31% since the beginning of 2008, denting the appetite of retail investors but, in the past two years, the more-than-45% returns from the Bombay Stock Exchange’s index have meant that a larger part of cash from household savings has found its way into the country’s capital markets.
Financial savings of the household sector (Graphic)
According to Reserve Bank of India (RBI) data, 10.5% of household savings flowed into shares and debentures in fiscal year 2007-08 against 6.6% in 2006-07. In 2005-06, it was 5.1%.
In absolute terms, at least Rs77,000 crore worth of household savings was invested in shares and debentures last fiscal, up from some Rs51,000 crore in the previous year.
Mutual funds accounted for the bulk of it—Rs56,800 crore in 2007-08 against Rs39,800 crore in 2006-07.
“Last financial year, a lot of money flowed into mutual funds to take advantage of the booming stock market. Besides, bank deposit rates were very low then,” said Dinesh Thakkar, chairman and managing director of Angel Broking Ltd, which also distributes mutual fund schemes of various fund houses. “A lot of the savings channelized towards the markets could also have come from youth, as they are less averse to risk.”
Still, the cautious nature of Indian market investors means that this pattern appears to have already reversed in the first quarter of fiscal 2008-09 with the stock market meltdown.
For instance, mutual funds’ net mobilization during April to June 2008-09 has been Rs38,437 crore, against Rs51,450 crore in the year-ago quarter.
Overall, the share of the household sector in total banks deposits declined from 69.2% in 1995 to 58.5% in 2006.
But, with the rise in interest rates, bankers expect bank deposits to emerge as a preferred savings instruments this year.
Commercial banks are now offering between 9.75% and 10.5% on one-year deposits and they will continue to offer such high rates till RBI brings down its policy rate.
The RBI has raised its policy rate by 125 basis points in phases since the beginning of fiscal year 2008-09 to fight rising inflation which is now ruling at 12.10%.
One basis point is one hundredth of a percentage point.
“In the last six months, interest rates on incremental one-year fixed deposits have increased substantially. The blended cost on deposits across maturities has gone up by 40-50 basis points. Banks are facing competition from fixed maturity plans of mutual funds which offer customers higher post-tax returns,’’ said Romesh Sobti, managing director and chief executive officer, IndusInd Bank Ltd.
Fixed maturity plans of mutual funds invest in debt instruments such as corporate bonds.
Rana Kapoor, managing director and chief executive officer of Yes Bank Ltd, admits that alternative investments have a built-in advantage of tax benefits compared with bank deposits but said, these changes of preferences are short term in nature and money comes back to bank deposits as for consumers, safety is the highest priority.
A “switch between asset classes depends on the macroeconomic environment. The stock markets have been rather volatile in the recent past and this will definitely see flow of funds to bank deposits,” said Shubhada Rao, chief economist of Yes Bank.
According to her, financial sector consumers are preferring fixed income plans and capital-protected instruments at this point but with the rise in interest rates she is confident that funds will flow back to the banking system.
The share of household sector in total bank deposits went down to 58.5% in 2006-07 from 60.7% in the previous year. The latest data is not available.
During the same period, share of industrial houses in bank deposits has risen to 9.7% from 7.8%.
An analyst with a Mumbai-based brokerage said the change in composition of bank deposits could push up cost of funds for banks as they pay higher interest rate to companies. Saugata Bhattacharya, an economist with Axis Bank Ltd, also shared his view and said corporate profitability has been on the rise for the past two to three years and industrial houses’ are keeping their excess cash with banks. However, this may change now with rising input cost and inflation depressing corporate profits.
However, individuals may prefer to park their savings with banks as both interest rates on deposits and equity market volatility are on the rise.