Tuesday, October 4, 2016


Mr. Urjit Patel, Governor of RBI on October 5, 2016, has announced a repo rate cut of 25 basis points – a six year low of 6.25 % from 6.5% with immediate effect (October 5, 2015).

Banks are expected to pass on the benefit of the rate cut to customers. Markets cheered the move, with Sensex rising 91 points and Nifty closing above 8, 750. A positive beginning for the new RBI Governor in kickstarting the so called marketing sentiments.

The assumption seems to be that the inflationary pressures would trim down over time. There may be calls for further cuts in the next round. However, such an easing needs to be balanced with the need to preserve positive real rates of savings to reverse the decline in it. IMF says that India’s gross savings rate has fallen to 31% of GDP, from 37% eight years ago. This is in contrast to China’s saving rate of 49-50%.

The moot point is whether the slowdown in India’s saving rate is influenced by cyclical factors or structural issues. In the rest of Asia, even when the savings rate have been falling, the per capita income has been going up, while India’s per capita GDP is amongst the lowest in the region and is stagnating.

Structural Factors, especially demographics, are in our favour. India’s dependency ratio is moving south, while that of Japan and China are rising. The working age group population (15-64 years) constitute nearly 2/3rds of our overall population.

Therefore, even as structurally the factors are favourable, the savings rate has hit a plateau due to cyclical factors.

The private sector, (households and corporate) is the main driver of total savings, while the public sector is a laggard. Within the private sector, households are the main source of savings which have been pulling down the rate of late.

From a high 70% or years earlier, households, now contribute to only 60% of overall savings. The reason may be low incomes plus long period of high inflation alarmingly forcing them to set aside more of their income for consumption and less for savings. Household savings now constitute only less than a quarter of the family disposal income – down 5%.

Two thirds of household savings comprise of fiscal assets to ward of inflation.
The latest monetary policy, unless it kicks off an investment boom, will not be of much help in increasing the savings rate. In short, in spite of the hype in rate reduction, savings are likely to be in the doldrums for quite some time to come.

Prof. K. K. Krishnan
Chairperson - CCR &
Prof. Centre for Insurance & Risk Management
Birla Institute of Management Technology

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