Where Is The Money?
Imentioned in my last column that the growth of money supply was down, and bank deposits are growing at just over 13 per cent.
Where Is The Money?
Banks are increasingly reliant on the Reserve Bank of India for their cash needs and, despite the recent relaxation in the cash reserve ratio (CRR), they have been tapping overnight funds from the central bank at record levels. This is in a situation where bank credit is growing at only 16 per cent per annum (p.a.) compared to over 30 per cent p.a. when our economy was rocking along in 2005-06.
No wonder, then, that our banks are looking for extra cash—State Bank of India (SBI) has been promised Rs 7,500 crore by the government and ICICI Bank is looking to sell $1 billion worth of bonds. In an effort to mobilise more deposits, SBI has announced higher rates on deposits beginning 1 April. This is in contrast to the hope from markets that RBI should cut interest rates. Whether that happens or not, I think SBI has had the right response to the situation—given the history of inflation, if our investors are rational, they need to be offered well over 10 per cent p.a. to compensate for taxes and higher prices.
Bank deposits are the plainest of plain financial products; other financial markets are faring even worse. Mutual funds are finding the going hard, and the exit of Fidelity, a world leader, is a harsh reminder of how stunted the Indian equity market is. A friend observed that our country’s yearly savings exceed Rs 30 lakh crore, but the accumulated equity assets managed by all mutual funds trail even that figure. The life insurance industry, traditionally a large channel for savings, also faces many challenges after it spent several years selling unit-linked insurance plans (Ulips), a strange hybrid of insurance and equity which seemed to be designed to benefit the distributor, and hid the caveats for the consumer in extremely fine print.
With bank deposits, equities and mutual funds, and life insurance each losing favour with the ordinary Indian household, the Indian financial sector is severely constrained to mobilise local funds. The government’s chronic fiscal deficit crowds the space hugely, and our markets are riding the waves, and troughs, of international finance—not a very comfortable state of affairs.
This raises two sets of questions: first, where are our savings going? And second, how do we invest in response? The answers to the first are very simple, land and gold. Neither investment adds productive value to the economy; it is only when land is worked upon, to convert it into mines, factories, shopping malls, or offices that value is added. As regards gold, the fact that we Indians continue to buy this ‘barbarous relic’ only underlines the lack of trust we have in our central bank’s ability to defend the purchasing power of its tender. Our finance minister has tried to tame our love for gold by raising import duties, but he knows he is walking a fine line as expensive legal imports will quickly be replaced by smuggling and the growth of criminal forces. If, in fact, the FM genuinely wants to decrease the amount of money going into land and gold, he needs to put his budgetary house in order, as only a sustained period of low deficits and steady prices will see Indians putting money into financial assets.
If you follow the ‘Trend is your friend’ theory, then one should put money into hard commodities: gold (here I go again) or cotton, or oil seeds. Or, buy shares of MCX, which were recently floated. At Rs 1,250, they’re a tad expensive, but I’d rather trust a virtual platform for hard goods than a soft government that delivers virtually nothing.
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