Monday 27 January 2014

Why people are parking money in post office deposits and NSC instead of god


Plentiful rains during monsoons have led to bumper crops, delivering a bounty to rural India as expected, but it's not gold that people seem to be buying with their surplus income.

People in villages and semi-urban areas are parking money in Post Office deposits and National Savings Certificates, instead of the usual practice of buying gold with their extra cash. That is a welcome change as India's penchant for gold had wreaked havoc with the country's external balances.

Though numbers are available only till November, agencies involved with small savings say 2013-14 will be a trend reversal year for financial savings. "There is 10% growth in the current financial year (in small savings)," said a government official handling small savings.

Inflows to savings instruments had dipped in the past couple of years as a combination of low economic growth and high inflation forced people to put their money in gold. Some also invested in real estate. India's domestic savings rate declined to 30.8% in 2011-12 from 34.0% in the previous year, the Reserve Bank of India had said in its annual report. But interest in gold is waning.

Steps by the government and central bank to curb gold imports have driven up its price, and many expect returns from the yellow metal to fall.

The nature of inflows into small savings instruments - deposits and savings certificates - suggests inflows are largely rural, the official said. The agriculture sector, the main employer of rural workforce, expanded 3.6% in the first half of the current fiscal year, up from 2.3% a year earlier, and the growth is expected to gather pace in the rest of the year because of the good monsoon.
Against a budgeted outflow of Rs 13,690 crore, there was a net inflow of Rs 3,940 crore in deposits and certificates in the April-November period. In contrast, the public provident fund saw an inflow of only Rs 6,428 crore against the more than Rs 28,000 crore expected for the same period.

Higher interest rates offered by small savings schemes have improved their attractiveness, and helped wean investors away from gold. The government had revamped the national small savings fund in December 2011, benchmarking returns on to market interest rates. Interest rates are now notified at the beginning of every financial year based on the average yields on government securities of similar maturity, with a positive rate spread of 25 basis points.

The fourth quarter is expected to bring in more robust inflows from urban areas as tax savers rush to make their deposits before the end of the fiscal year, the official said. According to him, these savings typically displayed a cyclical character.

Finance minister P Chidambaram had identified increasing savings as one of the focus areas for the government. "A high level of savings is a precondition to a high level of investment," Chidambaram had said after returning to the finance ministry in 2012.

The government and the RBI together had announced inflation-linked bonds to wean people away from gold. India imports most of the gold it consumers. According to authorities, huge imports of the metal were a key reason for India's wide current account deficit, which had pulled the value of the rupee to its lowest level against the dollar in August last year.
Source:-The Economic Times

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