Households return to safety of FDs despite falling rates
EROSION OF wealth in debt funds amid NBFC crisis, curbs on investment withdrawals have led saver back to FDs; annualised deposit growth rises to 10.3% by June end
Mumbai: Indian savers are flocking back to low-yielding but safe bank deposits after seeing erosion of wealth in debt funds amid NBFC defaults and curbs on investment withdrawals.
Annualised deposit growth rose from 8.1 per cent since the crisis in September 2018 to 10.3 per cent by June end. This has happened despite a 75 bps (one bps is 0.01 per cent) policy rate cut by the Reserve Bank of India (RBI) during the period, theoretically making debt-oriented mutual funds more attractive for investments. Yet, the share of assets in debt-oriented mutual funds schemes dropped from 31 per cent to 28 per cent. “For households, it is a very desperate situation as they have to park their savings in ‘safer’ bank deposits despite falling returns,” said Madan Sabnavis, chief economist at CARE Ratings.
“A number of mutual funds that have had exposure to NBFCs are seeing their NAVs eroded.”
In absolute terms, bank deposits rose Rs 11.8 lakh crore in the 9 months between September 2018 and June 2019, compared with a rise of Rs 8.8 lakh crore between June 2018 and June 2017. Assets under debt-oriented MF schemes have declined by Rs 20,000 crore since September 2018.
After the crisis in the NBFC sector following a loan default by infra-lender IL&FS in September 2018, many NBFCs also faced trouble. Mutual funds that heavily funded these NBFCs were seeing sharp erosions in the net asset value of their schemes, resulting in loss of investor faith in them.
For the Reserve Bank, the return of savers to bank deposits at a time when they are signalling low interest rate helps in monetary policy transmission. But it could impact overall consumption and spending pattern in the economy.
Such a surge in savings at lower returns could be counter-productive as people depending on interest income get less to spend,” said Sabnavis. Besides bank deposits, savers are also parking their money in corporate deposits, where the returns are higher than in bank deposits, but these instruments are perceived to be more risky as there is no protection on these deposits.