Inflation-hit Indian savers seek the comfort of gold, property

High inflation in the financial year ending March 2011 convinced Indian households to save less and move out of financial assets and into physical assets such as gold and property, according to government data.

Household savings dropped to 22.8 percent of GDP from 25.4 percent a year earlier, data showed.

Financial savings bore the brunt of the drop in savings confidence, as it fell to 10 percent of GDP from 12.9 percent the previous year. Indian families cut back their investments in provident funds, pension funds, shares and debentures. In comparison, physical savings rose to 12.8 percent from 12.4 percent of GDP.

Private-sector companies also pared their savings, bringing down their savings rate to 7.9 percent from 8.2 percent.

[caption id=“attachment_199917” align=“alignleft” width=“380” caption=“Physical savings such as gold and property rose. Reuters”]  [/caption]

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Only the public sector managed to up its savings rate to 1.7 percent of GDP from 0.2 percent the previous year.

The overall savings rate (including households, public-sector and corporate savings), nevertheless, slumped to 32.3 percent from 33.8 percent.

The outlook for this financial year (ending March 2012) doesn’t seem much better.

“In our view, elevated inflation (9.6 percent year-on-year) led to a drop in financial savings due to lower real returns, and encouraged households to invest in physical assets, such as housing, as a hedge against inflation,” wrote Sonal Varma, economist at Nomura in a recent report.

However, with inflation expected to ease by March, households could regain their confidence and invest more of their savings in financial assets.