High real interest rate but low household savings; here’s what is eating away your money

By: | Published: March 7, 2019 6:30 PM

The real interest in India are quite high at over 4 per cent compared to the historical standards. However, it has failed to galvanise financial savings.

The high real interest rates prevailing in India have clearly failed to shift households’ behaviour towards more savings, as unemployment, short term expenditures and financial borrowings have eaten into people’s pockets over the last five years, a report has shown.

Indian economy is showing no signs of improvement in the household savings for the last 4-5 years despite high real interest rate in the economy, said the report by Kotak Securities.

This poses a challenge for policy makers as they may now have to cut CRR to boost liquidity and support credit and investment needs of the economy, the report added. However, a further cut in monetary policy interest rate is unlikely as it may do little to reduce interest rates, given rising deposit rates.

READ ALSO: Modi’s Rs 6,000 PM-KISAN gift to small farmers may cut poverty by 20%; Kirit Parikh explains

Household savings rate has declined to 17.2 per cent in FY18 from 22.5 per cent in FY13, Kotak Securities noted in the report. While the household physical savings rate (residential real estate largely) has declined sharply and household financial savings rate has been largely stagnant. This is due to low employment opportunities, continued high consumption and rise in financial liabilities of households over FY16-FY18 to support short-term consumption, the report said.

The report has also taken a note of the rising share of private corporate profits in overall domestic savings over the past 15 years. This points out towards the reduced bargaining power of labour vs capital and low competition in several sectors, which may lead to strong resentment by the people, according to the report.

The real interest in India are quite high at over 4 per cent compared to the historical standards. However, it has failed to galvanise financial savings. The rate will fall automatically once inflation rises in the economy over the next few months, said the report. “In our view, the RBI may have to cut CRR to manage the rising gap between high credit growth and low deposit growth,” said Kotak Securities in the report

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition