Alternative investments becoming more attractive to retail customers: RBI

Alternative investment avenues are becoming more attractive to retail customers, the Reserve Bank of India (RBI) said while unveiling the monetary policy on Thursday, August 08. This was the 50th meeting of the Monetary Policy Committee (MPC) since its inception in September 2016.

“It is observed that alternative investment avenues are becoming more attractive to retail customers and banks are facing challenges on the funding front with bank deposits trailing loan growth,” the RBI said.

As a result, the RBI believes, banks are taking greater recourse to short-term non-retail deposits and other instruments of liability to meet the incremental credit demand.

 

“This, as I emphasised elsewhere, may potentially expose the banking system to structural liquidity issues. Banks may, therefore, focus more on mobilisation of household financial savings through innovative products and service offerings and by leveraging fully on their vast branch network,” RBI governor Shaktikanta Das said.

Analysts, on the other hand, suggest alternate investment avenues for retail investors such as InvITs, REITS, and portfolio management services (PMS) / stock markets have become popular with retail investors in the past few years that offer better returns than the regular fixed deposits (FDs) offered by banks.

“This could have been easily resolved by the government had they offered a higher tax incentive of say Rs 30,000 on income earned via FDs as compared to the current limit of Rs 10,000. It could have helped channelize some retail investor's savings into bank FDs instead of stock market-related avenues,” said Ambareesh Baliga, an independent market analyst.

While banks offer interest rates of up to 9 per cent (in case of select small finance banks), stock market returns in the past few years have been phenomenal and have beaten the return offered by banks hands down.

In calendar year 2023 (CY23), for instance, while the Sensex gained around 19 per cent, the midcap and small-cap indices on the BSE surged 27.3 per cent and 25.6 per cent respectively during this period, data shows. Gains in select stocks from the mid-and small-cap basket were even in triple digits.

“The RBI, too, indicated money (is) going into markets due to attractive returns; hence, banks are facing funding issues. It would be needless to say that currently RBI feels the financial market is robust, but is proactive to call out as these issues should not become a concern in future,” said Siddharth Karnawat, cofounder, Blue Sky Capital.

That said, RBI believes that the Indian financial system remains robust and can withstand the global shocks / turmoil triggered by a slowdown in a major economy, flare up in geopolitical tensions in the Middle East and the unwinding of the carry trade, which it believes can impact emerging market (EM) economies.

The Indian financial system, the RBI said, remains resilient and is gaining strength from broader macroeconomic stability and its well-capitalised and unclogged balance sheet is reflective of higher risk absorption capacity.

“India has built strong buffers that impart resilience to the domestic economy from such global spillovers. The Reserve Bank remains committed to ensure orderly evolution of financial markets in its regulatory domain,” it said.