- Looking around will amply demonstrate how the economy is heading as the rising inflationary trends are showing no signs of abating in the foreseeable future. Any layperson with a smatter of fiscal jurisprudence will comprehend the economic pinch at micro levels as running a household amid rising domestic costs is proving to be challenging. And it’s just the beginning of even harder times that only add to the growing concerns to stay afloat and lead a somewhat dignified life. Certain measures are underway that have indicated about the inflationary trend sustaining for a while. One such measure is the Reserve Bank of India’s monetary policy committee (MPC) increasing the repo rate last week. There’s ground to make two assumptions out of this move.
PC:
- RBI’s inflation outlook, which forecasts a declining trajectory in the subsequent quarters of the financial year, will be revised. Along with it, more repo rate increases are likely to be adopted. As such, these two widely held views will catalyze adjustments by all stakeholders in the economy. Yes, one way to gauge what lies ahead is to look at how the adjustments will play out through the intertwined saving and investment channels. Mind you, household response to hardening interest rates will hugely influence both savings and investment. Not only are households the most important source of domestic savings, but they are now also critical to the deployment of bank credit as personal loans are almost on a par with industrial lending.
- Any household behavior traditionally shows two features in a phase of high inflation. There’s a tilt at the margin towards saving in the form of gold. Reports mention that it was about 1.6% of household savings a decade ago when inflation was high. No sooner the inflation dropped, than the saving in gold followed, to about 1.1% of savings. Also, the net financial savings of households, which were about 32% of total savings in the high inflation phase, rose to around 40% when inflation fell. Now, there’s a new element that has come to play this time. Since October 2019, RBI has pushed the banking system into benchmarking lending rates to external measures such as repo rate transitioning the system in the case of loans to MSMEs, trade, and home loans.
PC: Christopher Rugaber
- In the process, bank deposit rates also adjust quickly. Further, there’s also the lure of gold as a hedge against inflation, which has a knock-on effect on India’s current account deficit. Investing in equity shares has emerged as an important avenue for household savings. Note that there are two options bound to attract more personal saver attention viz. bank fixed deposits and insurance policies. These traditionally popular avenues which attract funds from the risk-averse even when interest rates are low will almost surely see more incremental flows. Therefore, banks, flush with more funds, but with lending rates creeping up, will have new challenges. Meanwhile, common citizens will be bracing up to face hurdles in more than one way. Harder times ahead.
