With rising inflation pushing up the prices of most food items and home loan EMIs (equated monthly installments) beginning to pinch pockets, savings are on the wane.
Time deposits (or term deposits) of domestic banks grew by 11.5% to Rs 52.8 lakh crore in 2011-12, the lowest in six years (see graphic). The banking system also felt the heat. According to Reserve Bank of India (RBI) data, it has grown 12.5-24% in the last six years."Deposit growth did not pick last year," said M Narendra, chairman and MD, Indian Overseas Bank. "Consumers were saving less because inflation remained comparatively high during the last couple of years."
Inflation, measured by the wholesale price index (WPI), averaged 8.81% in 2011-12 compared to 9.57% in 2010-11.
To control inflation, the RBI resorted to monetary tightening and continuous hike in the repo rate, the rate at which RBI lends to banks. The central bank has hiked the rate 6 times or by 1.75 percentage points in 2011-12. In response, banks also raised lending rates as cost of funds increased, ultimately resulting in high EMIs for home loan borrowers.
“Last two years were difficult for home loan borrowers because their EMIs kept moving up, which hit there ability to save,” said Vishal Dhawan, founder, Plan Ahead Wealth Advisors. “To avoid higher EMIs in future, many customers used their savings to prepay loans.”
Growth in term deposits was also subdued as money went to other instruments such as gold, which turned out to be a safe haven in times of volatility. From Rs 20,700 per 10 gram in April 2011, the yellow metal rose to Rs 28,000 at the end of March 2012, a rise of 35%.
“A part of depositors money also went to gold which offered better returns than term deposits,” said KVS Manian, president, consumer banking, Kotak Mahindra Bank.