In a dim market, investments in small savings instruments jump 37%

The economy is slowing, private consumption has stalled and risk aversion has taken over the financial markets — all this is clearly visible in how the middle class saved its money in the beginning of this financial year (FY20). Investments in small savings instruments such as post office savings deposits, national savings certificates and public provident fund (PPF) have jumped 37 per cent in April-July 2019. This growth comes over a strong base — the collections had grown 38 per cent in the same period of 2018.

This is a continuing streak, especially for the post office schemes, April-July collections in which have grown sixfold since 2016-17, the demonetisation year. PPF, on the other hand, has lost sheen since then.

But more importantly, a look at comparable savings destinations for middle class in the first quarter of FY20 shows that apart from the small savings surge, liquidity in terms of deposits in banks shot up considerably, at the cost of mutual funds’ (MFs’) inflow, in the June quarter. 

In April-June 2019 (Q1FY20), bank deposits grew by Rs 1.14 trillion, according to Reserve Bank of India data, while the net inflow to MFs (barring liquid and ultra short-term funds) was Rs 12,000 crore, shows data from the Association of Mutual Funds of India.

In Q1FY19, bank deposits had grown (Rs 28,000 crore) slower than small savings collections (Rs 39,000 crore), while MFs inflow touched Rs 1.67 trillion. Open-ended MF schemes apart from liquid funds and ultra short-term funds have been considered for net inflow to MFs.

Experts said this demonstrates a clear risk aversion tendency as the markets have not shown improvement since the last one year or so.

Interest rates of small savings instruments are still high compared to bank fixed deposit rates. The former is at least 40 basis points (bps) higher than the latter. One bps is a hundredth of a percentage point. 

“Small savings schemes have been giving better rates than banks. But deposits, though growing at a nimble 10 per cent, are not a big concern for banks yet, as the demand for credit itself is subdued,” said Shubhada Rao, chief economist at YES Bank.

But, a market rebound can result in flight of money from banks as lenders are in no position to increase interest rates now, owing to a falling rates cycle, she added. 

This splurge of deposits pushed up bank deposits growth above 10 per cent for the first time in many quarters. But it is still below credit growth.

Soumya Kanti Ghosh, group chief economic advisor at SBI, said though this is better than the last few quarters, a declining rate cutting cycle puts an inherent pressure on further growth in deposits. Improving bank deposits growth could possibly be because of rejection of MFs in the June quarter, he said. 

“Slow inflow into MFs would have a negative impact on overall household savings for the year,” said Ghosh. Reduction in savings would not be conducive for the government’s plans to boost private investment.

Though there is no clear incentive to park money in banks, floundering market returns seem to have forced small and retail investors to retain the money in bank deposits, rather than parking it in MFs, said Deepesh Raghaw, a financial planner.

While the Sensex rose 6.5 per cent over Q1FY19, its growth fell to 1.3 per cent in Q1FY20. Similarly, in line with rate cycle correction, bond yields reduced in the latter period, while they had risen in the former. These two indicators show that returns on equity and debt MFs, respectively, were muted in the June 2019 quarter.

“Markets have been falling for more than a year now, and bank fixed deposits are giving better returns than MFs in many small- and mid-caps. But systematic investment plans seem on track,” he added.

Coming back to small savings, savings deposits and certificates’ inflow has jumped 41 per cent, while that in PPF have risen by nearly 20 per cent in the April-July period. Further, special schemes such as the Kisan Vikas Patra for farmers and the Sukanya Samriddhi Yojana for young girls offer interest rates that are more attractive than bank deposit rates.