The Demon In Demonetisation For Savers

Nov 11, 2016

In this issue:
» Highway projects to maintain a lousy track record
» Are the PSU entities undergoing a makeover?
» Sensex crashes over 700 points
» ...and more!

00:00 Chart of the day

Tanushree Banerjee, Co-Head of Research

The recent demonetization is great for honest tax payers, financial entities, lots of startups and the economy as a whole. Its impact on curtailing black money will be known over a period of time. But one area that it could hurt a lot is the household savings rate in the country.

More than 70% of the country's household financial savings is in bank deposits. The growth in bank deposits in India was at a 53-year low in FY16. The household savings to GDP ratio was at a 25-year low. To know the reason, one needs to look no further than the miniscule real interest rates (deposit rates adjusted for inflation) that the deposit holders were fetching. The poor yield on bank deposits had directly impacted by savings appetite of an economy that prides itself for its demographic dividend.

Demonetisation, will no doubt, forcefully swell the quantum of bank deposits. Unaccounted cash in the economy is estimated to be Rs 4.5 trillion. Even if a fraction of this finds its way to the bank coffers, it will be a problem of plenty for banks.

On one hand banks will have a deposit base much bigger than they would have earlier envisaged. On the other hand, the poor demand for credit is unlikely to pick up soon. The correction in bond yields has prompted corporates to raise funds via corporate deposits and non-convertible debentures (NCDs). Issue of NCDs, in fact, is at a seven year high. There will be few takers for bank loans at high yields. Threatened with prospect of poor margins, banks may therefore decide to cut deposit rates sharply.

The country's largest lender, State Bank of India, has already pegged its three year deposit rates at a decade low. Others are expected to follow suit.

Bank Deposit rates could go to Decade Lows

As per the data put forth by the Urjit Patel Committee (RBI), fixed deposits have lagged the returns from gold and real estate for most of last eight years. Even prior to that fixed deposit returns caught up with that on gold only in FY08. And when compared to consumer inflation, it seems that only gold that has offered any real returns.

The government's concern so far has only been about lower interest cost for borrowers. The fact that at negative real interest rates, bank deposits will become unviable, has been of little concern.

Reluctance to park money in low yielding bank deposits could have multiple adverse impact on the economy.

First, the household savings appetite could truncate further.

Secondly, investors looking for fixed returns may get lured by the steep yields offered by risky corporates on their bonds.

Thirdly, households may choose to go back to investments in gold and real estate instead of growing their financial assets.

The only chance of our fears being unfounded is if the government manages to cut down the fiscal deficit meaningfully. The RBI is expected to pay a bigger dividend this fiscal. And if that cuts down the fiscal deficit, the government's borrowing needs will automatically fall. This could lower the bond yields. Lower bond yields could eventually stoke the corporate borrowing appetite and give banks healthy return on their funds. Therefore such a virtuous cycle may to an extent prevent deposit rates from falling further.

In the meanwhile, apart from worrying about old currency notes, bank depositors in India should also be concerned about their returns.

In such a scenario, looking for alternative avenues of fetching relatively safe returns is a must. Here is a way to do it.

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Making tall claims and then failing to deliver them. Here we are referring to the government's lousy track in infrastructure projects. These mega highways are expected to be a boon to the Indian economy giving a fillip to India's infrastructure. They could help cut down the time and cost of transporting goods. But just like previous years, this fiscal too, the government is unlikely to meet its road building target. As reported in Business Standard, of the targeted 25,000 km highway projects, a meagre 18% have been awarded during the current financial year. Land acquisition, environment and forest clearance continue to remain the key hinders.

Highways are the arteries of an activity like manufacturing. Now if India has to take on the baton of world's manufacturing hub, one cannot be much hopeful without strong infrastructure. We sincerely wish for the day to see when there will be good planning and impeccable execution on this front.


The PSU index recently hit 52 week high levels. Various public sector banking stocks saw a sharp surge. The government's recent, move of demonetization is expected to pave way for more funds in the banking sector. With minimal efforts the low cost CASA (Current and savings account) deposits of the banks are expected to swell.

It reminds the days of 2014, when the change of government at the Centre infused confidence in the economy that was faltering on multiple fronts. In anticipation of quick turnaround, various PSU stocks particularly the banking stocks witnessed investors' favour. But within months, many of those that had touched new highs fell sharply.

The fact remains that the interest in PSU stocks is backed by speculation and change in sentiments rather than fundamentals. The challenges related to PSU firms are many but they are not insurmountable. There is huge untapped value in these firms. But not every PSU stock is worthy of investment.

The StockSelect team has been very selective in recommending the bluechip PSUs.


In the meanwhile, Indian share markets continued witness sharp correction due to weak Asian cues. Major sectoral indices are trading in deep red with consumer durables and auto stocks witnessing maximum brunt. At the time of writing, The BSE Sensex is trading lower by 724 points (down 2.6%) while the NSE Nifty is trading lower by 156 points (down 2.3%). Both BSE Mid Cap index and BSE Small Cap index are trading down by around 3.9% and 4.2%

04:50 Investing mantra

"Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it." - Peter Lynch

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

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2 Responses to "The Demon In Demonetisation For Savers"


Nov 12, 2016

According to bloomberg almost 45 billion dollars worth of currency will go unclaimed. Therefore, we definitely see record low interest rates.


venkatasamy subburam

Nov 11, 2016

4512470073The comprehensive article gives me -why and how the demon demonstration-a view of our savings habit and how it is to help the country or people.

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