Home >Money >Personal Finance >PPF, small savings deposit growth slowing. Where are investors parking money?

Despite higher interest rates on some small savings schemes like PPF (Public Provident Fund) as compared to bank deposits, the growth in small savings deposits is slowing down and money is moving to liquid fixed deposits. The reason could be that the people are keeping more savings in liquid assets amid the disruption caused by the coronavirus, say SBI economists.

"The incremental small savings deposits has significantly slowed down as a percentage of incremental ASCB or All Scheduled Commercial Banks deposits in current fiscal with people keeping money more in liquid bank deposits rather than locking them in financial savings," SBI economists said in a report.

"In FY19, the incremental small savings deposits was 24% of incremental ASCB deposits. Interestingly, this trend has somehow slowed down in current fiscal with people keeping in money more in liquid bank deposits rather than locking them in financial saving (the share is now 14%)," the report said.

Despite falling yields in government securities, the government did not revise the interest rates on small savings schemes for the September quarter. It kept interest rates steady after cutting them sharply by 70-140 bps for the June quarter. PPF currently fetches interest rate of 7.1%.

"Had the Government followed the formulas strictly, rates on different small savings instruments would now have been lower by 40-50 bps and the PPF rate would have below 7% mark," the SBI report said.

On the other hand, many banks have cut their deposit rates as well as savings rate amid adequate liquidity in the financial system.

In response to COVID-19 crisis, RBI has supported the financial markets through a number of liquidity measures, along with a 115 bps reduction in repo rate, 155 bps in reverse repo and 100 bps in CRR between March and May 2020, the report said.

"The perpetually muted credit demand has pushed the banks to reduce their deposit rates and thereby lending rates to adjust to the new interest rate scenario. To reduce the cost of funds and rigidity in deposit structure of Indian banks, banks (both public & private) have lowered the savings bank deposits rate, which has around 40% weight in the deposits basket," the report said.

Growth rate in components in household financial savings
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Growth rate in components in household financial savings

On the other hand, the supply side constraints due to the lockdown have led to a spike in CPI inflation so the real returns (interest rate minus inflation) for savers have turned negative, says the report.

"If we look the CPI inflation adjusted deposit rate (i.e. Real interest rate), it has turned negative to –0.8% in Dec’19, when inflation touched 7.4% and deposits rate 6.6% and thereafter continued in the negative zone due to the uptick in inflation and downward interest rate scenario," the report said.

"We expect that inflation will remain at elevated levels for the next few months so the real interest rate will continue to be in the negative zone. We believe in the current scenario, this will be appropriate for financial markets as negative real rate is unlikely hurt household financial savings given the uncertainty surrounding pandemic. Interestingly, our empirical results suggest a significantly weak linkage between household savings in bank deposits and real rate of interest," the report added.

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