Indians not just risk averse, stressed for income too, shows data

While equity MFs show decline in flows, growth in life and health insurance premiums is robust. Gold is attractive yet expensive and small savings and bank deposits are growing stronger as ever

In a black-swan event like the Covid-19 pandemic, no prediction is turning out to be accurate: be it an analyst's projection of the earnings of a company, or an economist's estimation of the contraction in economic growth. But one thing appears certain amid this chaos. 

The pool of finance that propels productive investment in the economy is distressed. Savings in the economy are getting directed to instruments that are safer for the individual but difficult to use for economic value addition, be it investment or consumption. 

If risk aversion and income stress continue in these times of uncertainty, the road to economic recovery could be harder to tread than anticipated, economists and experts portend. 

Let us first look at the most accessible forms of savings available to Indians: bank deposits (savings and fixed) and small savings offered by the Union government. 

Bank deposits are growing at 11 per cent year-on-year, up from an average of 8-10 per cent the past two years, according to Reserve Bank of India (RBI) data. But this growth in deposits is not associated with a commensurate growth in loans extended by banks. Credit growth is going in the opposite direction, and has touched 5 per cent in July 2020. 

This shows that people are not removing money from banks to invest in products that generally give better returns, such as mutual funds. More so, SBI Research finds that there is a rural-urban divide in this preference for safety. 

“The growth in deposits in rural India is about 15 per cent, and that in urban branches is lower,” said Soumya Kanti Ghosh, chief economist at the State Bank of India. 

In a situation when the banking system is flush with liquidity and there is hardly any taker for new credit, bank deposits getting stronger by the day indicate risk aversion, said a recent CARE Ratings report by Sanjay Agarwal and others.

The one percentage point rise in deposits growth is substantial, as the quantum of bank deposits is Rs 140 trillion, higher than any other asset class. 

Mutual funds have clearly taken a big hit, at a time when stock market turnover is growing steadily. Equity mutual funds are the best segment for retail (individual) investors, and that very segment saw a net outflow after four years in July, meaning that people withdrew more money than they invested in equity MFs. 

The outflow from equity mutual funds was substantial at Rs 2,480 crore, compared to the average monthly inflow of Rs 6,000 crore in the last year, shows data from the Association of Mutual Funds in India (AMFI). 

Experts have also noted that mutual funds investors resorted to profit booking once the market rally got stalled. Ghosh added that many mutual funds are now investing in sovereign bond instruments rather than equity. “This could be another reason for money running away from mutual funds,” he said. 

But at the same time, people are strongly preferring to put their money in insurance products. Life insurance premiums had gone into a severe contraction in the first few months of the pandemic. Data from the Insurance Regulatory and Development Authority of India (IRDAI) shows that from falling 33 per cent in April and 25 per cent in May, first premiums for new life insurance policies have risen 7 per cent in July 2020. Health insurance premiums have grown stronger at 10 per cent. 

Clearly, a public health emergency riddled with uncertainty at both ends—the infection rate of the virus as well as the mass production of a working vaccine—has prompted people to buy insurance, and limited their appetite for investment products such as mutual funds.  

Gold is considered to be the safest haven for individuals. Despite that, the consumer demand for gold has fallen sharply by 70 per cent in the quarter ending June 2020. Much of this has to with the jump in prices, but there are other reasons too, say experts. 

“The closure of jewellery shops and the unavailability of workers hit the industry badly. In addition, people’s incomes have fallen, and the costly gold is now unaffordable for many,” said Pravin Kothari, chairman at the Indian Bullion and Jewellers Association. 

There are broadly three types of gold demand: consumer, investment and technology, in which the first two are the major ones. 

Kothari added that the apparent rise in investment demand propelled during the pandemic due to the safety of gold has now started showing signs of decline. 

“Only a vaccine can put an end to the uncertainty. Further quantitative easing by the United States and subsequent stimulus to the economy will further raise gold prices. Correction is still far away,” he said. 

In this rapidly changing savings scenario, small savings have still remained the public favourite. Investments in instruments such as public provident fund and post office savings deposits got catapulted after demonetisation. In this crisis year, small savings have refused to fall, and the accruals in the quarter ending June have been close to previous year’s. 

Though fall in incomes is real, a part of the salaried class has seen rise in disposable finances this year, as their expenses on hotels, travelling, luxury has reduced, said SBI’s Ghosh. This has resulted in a shift of money from these consumption avenues to savings or investment instruments. 

This could well be the reason retail investors are flocking the stock market. The turnover in BSE rose 135 per cent in June 2020, propelled not only by new investors, but also by the ticket size per stock investment.