Falling household savings can widen CAD, lead to higher rates: India Ratings : 30-03-2019

Declining household savings can widen the current account deficit and push the interest rates up, warns a report.

A wider current account deficit (CAD), which is the gap between what a country earns by exports and spends on imports, has in the past led to instances of steep fall in the rupee, while a jump in the interest rates will render the Reserve Bank’s ongoing rate cuts ineffective .

These scenarios can come true if gross household financial savings net of financial liabilities continue to grow slower than the net borrowings of the Centre and the states plus their dependence on extra-budgetary resources and the gap is funded by external sources, India Ratings said in a report Friday.

Households’ gross financial savings net of financial liabilities has increased at an annualised rate of 9.8 percent to Rs 11.29 lakh crore in FY18 from Rs 6.43 lakh crore in FY12, the report said.

However, net borrowings by the Centre and the states and also their extra-budgetary resources rose to Rs 11.55 lakh crore in FY18 from Rs 6.28 lakh crore in FY12, registering an annual growth of 10.7 percent.

During the same period, states’ net borrowing grew at an annualised rate of 33 percent followed by extra-budgetary resources growing at 15.1 percent and the that of the Centre at 0.5 percent, it said.

The ratio of gross household financial savings net of financial liabilities compared with net borrowings of the Centre and the states and their extra-budgetary resources slipped to 0.97x in FY18 from 1.02x in FY12 and 1.38x in FY16, the report said.

With G-sec yields continue to remain at elevated levels due to low household savings, and the cost of money in the economy may be higher despite policy rate cut by the Reserve Bank, it said.

“For this ratio to improve either gross household financial savings have to increase or funding requirements of the Centre and states along with their dependence on extra- budgetary resources have to decline,” it recommended.

Relying on external funding is an alternative, it said foreign portfolio investments are at very low utilisation levels of 17 percent for state development loans.

The report, however, is quick to warn that the fickle nature of FPI can be quite destabilising for the economy and the same has been witnessed on a number of occasions in the domestic context. The low consumer price inflation is the silver lining for the moment, it said.

Source : Financial Express

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