Prime Minister Narendra Modi's surprise demonetisation announcement in 2016 was widely expected to impact Indian household savings patterns. But, the RBI's latest annual report reveals that the impact was pretty transient.Indians have reverted to saving up in cash, and how. The share of currency in household savings is the second highest after deposits. While household savings held in the form of currency are at the highest level since 2011 - suggesting that disposable funds are exiting the banking system yet again - the share of deposits is touching decadal lows.
Cash savings as a percentage of gross national disposable income (GNDI) surged to 2.8% in the last fiscal, according to preliminary data released by the apex bank. In fact, the latest figure is more than double the average for the five fiscals before demonetisation. At the same time, the share of savings in banks and corporate deposits more than halved to 2.9%. In the two fiscals before demonetisation, the figure had stood at over 4% and had spurted to 6.3% in FY17.
In fact, according to The Economic Times, FY18 deposit growth in the banking system was the slowest in five decades. And that is courtesy the decline in fixed deposit rates following cuts in RBI policy rates.Contrary to the popular narrative about Indians increasingly getting lured by the siren song of the Sensex, the country by and large stays away from high-risk savings avenues. As per RBI data, although savings in the form of shares and debentures is the highest in the past seven fiscals, it still constitutes an abysmal 0.9% of GNDI. On the other hand, savings parked in pension and provident funds is back to the pre-demonetisation (FY16) level.
Overall, while gross financial savings of households are at the highest level since 2011, net savings have dropped sharply. This is due to the spike in household financial liabilities to 4% of GNDI - up over 42% from FY16.
According to the RBI, "net financial assets of the household sector increased to 7.1% of gross domestic national income in 2017-18 on account of an increase in households' assets in the form of currency". The bad news is that household financial savings - described as the most important source of funds for investment in the economy by the apex bank - has dipped below the average for the five years before the scrapping of the Rs 500 and Rs 2000 currency notes.
Furthermore, the currency in circulation (CiC) stood at Rs 19.38 lakh crore as of August 17, 2018, which is higher than the pre-demonetisation levels. Consequently, India's currency to GDP ratio is once again among the highest, not only compared to peer emerging market economies but also advanced economies.
Citing an economist with a local bank the daily added that monetary policy transmission, which was seen improving in recent months, might again slow down as cash moves out of the banking system.