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Business News/ Opinion / Online-views/  Views | Risk aversion in Indian households
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Views | Risk aversion in Indian households

Views | Risk aversion in Indian households

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Global gold prices are rising once again on expectations that Western central banks will unleash another torrent of liquidity, aka QE3, to stimulate their economies. Domestic prices have followed suit.

In the annual report of the Reserve Bank of India released last week, one gets a good sense of how the fascination among Indian households for physical assets such as gold can reduce the funds available for the formal financial system. The data there shows how household savings in financial assets have dropped between FY10 and FY11, from 8.4 trillion to 7.7 trillion. On the other hand, household savings in physical assets have grown from 8 trillion to 9.8 trillion. Within financial assets, money has moved out of mutual funds while flows into bank deposits have grown.

The data tells us two things. First, Indian households have been placing more of their savings into physical assets rather than into financial instruments. Second, they have been keener on bank deposits rather than more risky assets linked to equity. Low interest rates should actually make bank deposits --- which have been giving negative real returns --- less attractive. Such financial repression is one reason why Indians are buying gold and real estate even at these prices --- they act as very effective hedges against high inflation. But, within the shrinking financial portfolio, the preference for bank deposits shows extreme risk aversion.

The government may rail against what it likes to pretend is the irrational behaviour of Indian savers. But the combination of high inflation, negative real interest rates, slowing growth and policy drift makes such savings behaviour seem very rational.

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Published: 28 Aug 2012, 05:04 AM IST
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