A NEW ADDITION RBI rate cut unlikely to boost household savings Lower real interest rate the major issue
Even if the RBI reduces key policy rates in deference to the marginal drop in inflation on Friday when it announces its credit policy, it is not likely to boost household savings or corporate savings.
The reason is that inflation at 5.96 per cent is still high. The consumer price index is also still double digit. Chronically high inflation of recent years has pushed down real interest rates (real interest rate = nominal interest rate - inflation) to negative territory despite the rise in the policy rate and tight liquidity (resulting in the effective rate hovering at the top end of the policy corridor) according to a Deutsche Bank research on Impact of rising real interest rates.
The report said between 2011-13, real rates were mostly negative thereby reducing the incentive for Indian consumers to save.
The (smaller) stock of savings has been instead channeled increasingly to gold and real estate, it said.
Data show that household savings declined to 22.3 per cent of GDP in FY12 from a peak of 25.2 per cent of GDP in FY10.
“There was also a discernible decline in financial savings, reducing the pace of deposit growth in The possible slash in key policy rates by the Reserve Bank of India may not boost household or corporate savings as inflation at 5.96 per cent is still high and the chronologically high inflation in recent years has pushed down the real interest rates (the difference between nominal interest rate and inflation) to negative territory despite the rise in the policy rate and tight liquidity, according to a Deutsche Bank research on ‘Impact of rising real interest rates’. the banking system,” says the report. As far as the domestic economy is concerned Dun&Bradstreet India expects savings propensity to improve marginally to 30.3 per cent during FY14 from estimated low of 29.2 per cent during FY13.
The government it said needs to take initiatives to boost the savings of the household sector by easing inflationary pressures, lower fiscal deficit and revive domestic sentiment.