Above normal return from gold not sustainable in long term: RBI

Household savings finding its way to gold is a cause of concern

The households sector savings has been finding its way to asset like gold and this is a cause of concern in the long-term. This is because the price of gold carries an uncertainty premium arising from risk aversion among investors in recent years. This has caused an above normal return that is not sustainable in the long term, said Financial Stability Report released by the Reserve Bank of India (RBI) on Friday.

"Since Indian households hold a significant quantity of it, they face the risk of a correction in gold prices," the report said.

But on a year-on-year basis, gold offered the highest returns among asset classes for majority of the years after the global financial crisis.

"Gold is easily accessible. It is a store of value, has no credit risk and is relatively liquid thereby incentivising many households to buy gold," the report stated.

Fall in financial savings has implications for capital formation as it channelises savings towards unproductive holding of gold. If gold supplants financial savings as a primary form of savings, it has stability implications for the financial sector, said the report.

According to the RBI financial savings of the household sector declined to a two-decade low of 7.8% of Gross Domestic Product (GDP) in 2011-12 from 9.3% in 2010-11 and 12.2% in 2009-10. "Even in absolute terms, financial savings fell from Rs 7.9 lakh crore in 2009-10 to Rs 6.9 lakh crore in 2011- 12," said the report.

This has happened despite nominal GDP (at market prices) rising by more than 15% during the period. Admittedly, households have been shifting away from financial assets into physical assets and valuables such as gold as evidenced by increase in gold imports, the report points out.

According to the report a number of possibilities could explain the fall in financial savings. "Inflation has been high during the past few years. Consequently, real return on financial assets has been very low," the report said. Households seem to have shifted their savings from assets earning low real rates to assets perceived as inflation-proof. There has thus been a substitution towards non-financial assets like real estate and gold; the real returns on which have been relatively high, said the report.

In addition to the higher real returns on gold and residential housing, other factors could be impacting the fall in financial savings and an increase in physical savings and valuables in household savings, the report said.

"Relatively easy availability of bank credit for housing and the commensurate rapid increase in bank credit during the early and mid-2000s has provided a fillip to house prices," the report said.