Who's winning when Nifty is @12k?
Today nifty mounted 12000+ but what did that do to individual portfolios and wealth? Who's actually winning? This blog examines these questions in the light of domestic savings and shift in investment patterns!
Domestic Savings
Domestic savings in India comprises of 3 sectors - households, Private & Public sectors. Households make up the largest pie, making 60% of total domestic savings. Most of the household savings are stored in 2 forms - physical assets (home/land/gold) and financial assets (bank deposits, bonds, stocks & mutual funds). India's savings rate as a % of GDP has declined from 36% (2009) to 30% (2019).
Between 2009 & 2019, in particular, households savings rate as a proportion of GDP (Gross Domestic Product) declined from 25.2% to 17%. While inflation was high at 9-11% between 2009-13, it was subsequently brought down by RBI's inflation-targeted monetary policy to sub-4% in 2019. This means, real interest rates (nominal rate minus inflation) on bank deposits not only became positive but also in the range of 3-4%, highest in the world now.
Herculean shift from Physical assets to Capital market Assets
Due to the slowdown in real estate market and the poor rental yields, the much needed herculean shift occurred in households savings from physical assets to financial assets such as capital market assets and not just to bank deposits (which are cash assets). This is evident from the slow growth of bank deposits from Rs.100 Lac crores in FY2016 to Rs.125 Lac crores in FY2019 ending march, which amounts to a meagre growth rate of 5.7% p.a.
Contrast this to the growth in mutual funds AUM (assets under management) in the same period from Rs.12.3 Lac crores to Ra.24.51 Lac crores, growing at nearly 20% rate p.a. While households are clearly re-allocating more of their savings to financial assets, the overall savings rate of households has dipped to new lows at 17% of GDP in 2019, why?
Answer lies in the Basics:
Income - Expense = Savings
Expenses predominantly decides savings. And expenses rise (fall) based on inflation. Given that inflation is low, one would expect savings to rise. But a closer examination of household income suggests a key fact. Incomes have not risen or have risen very marginally in low single digits. Due to this, households have resorted to credit - availing loan / taking on debt to meet their lifestyle needs.
As a result, the disposable income of households have significantly dropped leading to lower savings. Similarly public sector's savings have also declined in this period, but this is healthy decline as government spending on social sector is needed to keep the economy running.
So, who's winning?
Only one sector has been showing growth in savings - its the private sector. The rising share of private corporate profits in overall domestic savings only brings forth the reduced bargaining power of labour vs capital and low competition in several sectors.
This is also evident in the fastest growing rate of Indian billionaires and millionaires in the world. Perhaps this explains who's winning when nifty peaks to 12k given jobs are hard to find and the economy struggles to touch 7%!?!
Domestic Savings
Domestic savings in India comprises of 3 sectors - households, Private & Public sectors. Households make up the largest pie, making 60% of total domestic savings. Most of the household savings are stored in 2 forms - physical assets (home/land/gold) and financial assets (bank deposits, bonds, stocks & mutual funds). India's savings rate as a % of GDP has declined from 36% (2009) to 30% (2019).
Between 2009 & 2019, in particular, households savings rate as a proportion of GDP (Gross Domestic Product) declined from 25.2% to 17%. While inflation was high at 9-11% between 2009-13, it was subsequently brought down by RBI's inflation-targeted monetary policy to sub-4% in 2019. This means, real interest rates (nominal rate minus inflation) on bank deposits not only became positive but also in the range of 3-4%, highest in the world now.
Herculean shift from Physical assets to Capital market Assets
Due to the slowdown in real estate market and the poor rental yields, the much needed herculean shift occurred in households savings from physical assets to financial assets such as capital market assets and not just to bank deposits (which are cash assets). This is evident from the slow growth of bank deposits from Rs.100 Lac crores in FY2016 to Rs.125 Lac crores in FY2019 ending march, which amounts to a meagre growth rate of 5.7% p.a.
Contrast this to the growth in mutual funds AUM (assets under management) in the same period from Rs.12.3 Lac crores to Ra.24.51 Lac crores, growing at nearly 20% rate p.a. While households are clearly re-allocating more of their savings to financial assets, the overall savings rate of households has dipped to new lows at 17% of GDP in 2019, why?
Answer lies in the Basics:
Income - Expense = Savings
Expenses predominantly decides savings. And expenses rise (fall) based on inflation. Given that inflation is low, one would expect savings to rise. But a closer examination of household income suggests a key fact. Incomes have not risen or have risen very marginally in low single digits. Due to this, households have resorted to credit - availing loan / taking on debt to meet their lifestyle needs.
As a result, the disposable income of households have significantly dropped leading to lower savings. Similarly public sector's savings have also declined in this period, but this is healthy decline as government spending on social sector is needed to keep the economy running.
So, who's winning?
Only one sector has been showing growth in savings - its the private sector. The rising share of private corporate profits in overall domestic savings only brings forth the reduced bargaining power of labour vs capital and low competition in several sectors.
This is also evident in the fastest growing rate of Indian billionaires and millionaires in the world. Perhaps this explains who's winning when nifty peaks to 12k given jobs are hard to find and the economy struggles to touch 7%!?!
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