Indians saving less in banks, mutual funds, insurance By CHETAN AHYA, MORGAN STANLEY Net financial savings decelerated to 7.8 per cent of GDP in F2012. According to preliminary estimates released by the Reserve Bank of India (RBI), net financial savings moderated to 7.8 per cent of GDP in F2012 from 9.3 per cent of GDP in F2011 and 12.2 per cent of GDP in F2010. Gross financial savings as percentage of GDP decelerated to 10.9 per cent in F2012 from 12.9 per cent in F2011 and 15.3 per cent of GDP in F2010. Net financial savings comprises cash investments, deposits with banks and non-bank companies, investments in shares, debentures, mutual funds, small savings and also life insurance, provident and pension fund. Household financial savings dipped to this level back in F1990 (7.8 per cent of GDP). What caused the decline? According to the preliminary estimates released by the RBI, the drop in net financial savings can be attributed to an absolute decline in small savings and lower growth in households’ holdings of deposits, currency and life insurance funds. Slower income growth and higher inflation likely to have affected household financial savings. RBI attributed the decline in net financial savings to persistently high inflation, leading to low real rates on bank deposits and small savings funds, coupled with uncertain global environment adversely impacting equity market returns, leading households to favour investments in valuables such as gold. In addition to these factors, we believe slower urban job creation and income growth would also have affected the rate of household savings. Improvement in real rates should increase household financial savings in F2013: We expect some moderation in inflation in F2013. However, we believe that the pace of reduction will be slow, and trend in government finances as well as rural wages will play a key role in containing inflation expectations. We believe the consolidated fiscal deficit (including off-budget items) will remain high in F2013 at 8.8 per cent compared with 9 per cent in F2012. We estimate household financial savings to improve to 8.6 per cent of GDP in F2013. Key upside/downside risks to our forecast will be the government’s fiscal management and hence overall inflation trend.