BackA lower savings rate in the first quarter of FY16 may limit RBI rate cuts
As household savings, which account for 70% of total savings in India, are related to interest rates, lower savings restrict the monetary authority from cutting interest rates faster, say analysts
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India’s current account deficit (CAD) was at 1.2% of gross domestic product (GDP) during the first quarter of the current fiscal year. Most commentators have said this is manageable. The other way to look at CAD, however, is to see it as the difference between investment and savings. If domestic savings is lower than investment, we have a CAD.
The chart shows the fall in both savings and investment rates since 2012, with the investment rate falling much more than the savings rate. CAD peaked in the third quarter of FY13, when investment was 35.3% of GDP and savings 28.6% of GDP. Since then, the investment rate has continued to fall, but the savings rate is up a bit. That has led to a lower current account deficit.
But that trend might be changing, with savings starting to fall again.
A report by Nirmal Bang economist Nikhil Gupta points out, “Notwithstanding lower investments, higher CAD implies a faster fall in domestic (implied) savings, which are estimated to have fallen to 29.7% of GDP in 1QFY16 from 30.2% in FY15. This, we believe, could act as one of the biggest constraints in increasing investments over time. Further, as household savings, which account for 70% of total savings in India, are related to interest rates, lower savings restrict the monetary authority from cutting interest rates faster. This is one of the main reasons why we have projected limited monetary easing. Further, consumption growth needs to remain subdued (or fall further) to allow re-building of savings, which will help increase investments."
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