Households swung cash to equities, real estate in H1

Indian households seem to have withdrawn cash from bank deposits and fixed income funds, only to put these in higher yielding asset classes.

According to a Morgan Stanley Research report, households withdrew Rs 92,000 crore from these two instruments in the first half of 2010 and put the cash in higher-yielding assets. "Bank deposits became particularly unattractive during 1H2010 (first half of 2010) due to fall in nominal interest rates and rise in inflation," the report said. For instance, State Bank of India’s average one-year fixed deposit rate fell from 7.9 per cent in June 2009 to six per cent at the end of June.

But with banks raising deposit rates, due to slower growth as well as an increase in monetary policy rates, some households might shift back to bank deposits, at the expense of small savings schemes such as the public provident fund. "From a longer term perspective, as the savings rate rises on the back of improving demographics, household demand for risk assets could surprise the upside," Morgan Stanley said in the note.

Homes, stocks

The steepest increase in investment was seen in the case of equities, thanks to the global recovery in stock markets that started in March 2009. While retail investors had initially shied away, given the uncertainty, they have now made a strong comeback and invested over Rs 22,000 crore in equities, either directly or through institutions such as mutual funds. Morgan Stanley has used the data for change in shareholding of the public, mutual funds and institutions for 1,250 National Stock Exchange-listed companies to arrive at its calculations.

In case of house property, a decrease in prices in late 2009 and early 2010 buoyed investor sentiment and it emerged as the most preferred investment segment. At the same time, there were a plethora of home loan schemes on offer from banks, with most of these offering to fix interest rates during the initial few years of the loan tenure. As a result of these factors, Morgan Stanley has estimated that investment into this asset class went up 5.5 times to Rs 74,800 crore (see table).

According to these estimates, sale of residential units in the country’s top seven cities more than doubled from 37,700 in the first half of 2009 to 92,100 units in 2010. Similarly, mortgage loan volumes, used as a proxy for residential house purchases, went up to Rs 27,900 crore during the first half of 2010, compared to Rs 9,840 crore in the corresponding period last year.

Purchase of new insurance policies picked up post-November 2009 to emerge as the second largest investment class, with growth of the order of 37 per cent.

The agency, however, warned that its data did not cover the entire household ownership of financial assets.