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Demonetisation Spurred Investments In Mutual Funds And Insurance Plans, Suggests RBI Study

Demonetisation may have pushed formal savings, says RBI study.



Indian rupee banknotes of various denominations sit in a cash register at at the checkout counter of a Big Bazaar hypermarket, operated by Future Retail Ltd. (Photographer: Dhiraj Singh/Bloomberg)
Indian rupee banknotes of various denominations sit in a cash register at at the checkout counter of a Big Bazaar hypermarket, operated by Future Retail Ltd. (Photographer: Dhiraj Singh/Bloomberg)

Prime Minister Narendra Modi’s decision to scrap old high-value currency notes last November and the subsequent crackdown on cash transactions may have triggered a shift from physical assets to financial savings, a central bank study suggests.

There has been a “distinct increase” of inflows into formal channels of savings such as equity and debt-oriented mutual funds and life insurance policies, according to the Reserve Bank of India’s Mint Street Memo. Even non-banking financial companies were “positively impacted in terms of collections and disbursals”, it said.

Demonetisation appears to have led to an acceleration in the financialisation of savings.
RBI’s Mint Street Memo

Net inflows into mutual funds between November and June soared to Rs 1.69 lakh crore from Rs 9,160 crore in the year-ago period, according to data from the Securities Exchange Board of India cited in the study. This came as the government barred cash transactions of more than Rs 2 lakh and asked people to explain the source of large deposits after the note ban. Demand for real estate and gold declined immediately after demonetisation. Deposit rates too fell as banks were flush with liquidity after people turned in their cash held in banned notes.

The reduction in rates on bank deposits after demonetisation and a decline in gold prices “enhanced the relative attractiveness of both debt- and equity-oriented mutual funds”, the study said. This was backed by a buoyant equity market which hit record highs multiple times this year.

Demonetisation Spurred Investments In Mutual Funds And Insurance Plans, Suggests RBI Study

Premium collected by life insurance companies more than doubled in November when demonetisation was announced. The study noted that most of these were single-premium policies where the amount is paid in lump sum rather than periodically. The total life insurance premia collected between November and June was 46.3 percent higher than the year-ago period at Rs 42,210 crore.

The study also showed that loan repayments, which had taken an immediate hit after the cash crunch, rebounded and were comfortably growing over the monthly average collection seen till October last year.

These developments may incentivise the greater shift from physical to financial savings, the study said, adding that a declining inflation would provide an impetus to financial savings.

Bank Deposits Swell

Demonetisation sucked out 86 percent of the currency in circulation as it was deposited with banks, which led to a sudden jump in liquidity in the banking system. The cash came to current and savings accounts.

The study estimates that the excess bank deposit growth has been in the range of 3-4.7 percentage points over last year. Between November 11 and December 30 last year, Rs 2.8 lakh crore to Rs 4.3 lakh crore is estimated to have come in through deposits in the banking system.

Certain accounts, which did not show any significant activity during normal times, saw ‘unusual’ cash deposits after demonetisation, the central bank’s study said.

Demonetisation Spurred Investments In Mutual Funds And Insurance Plans, Suggests RBI Study

The share of current and savings accounts in the whole banking system too improved by around 4 percentage points since demonetisation.

The cash ban also boosted Modi's financial inclusion campaign. Deposits into Jan Dhan accounts saw a 48 percent increase after demonetisation. New Jan Dhan accounts opened after demonetisation stood at 3.82 crore till July 26, of which 1.8 crore had been opened till January 25 itself.