The Changing Face Of Savings And Investment In India

A conundrum for any individual is where to save or invest money. 2025 has been a year of volatility, which started right from the time Donald Trump took over as president. His stance was quite singular: Make America Great Again. The issue of tariffs attained several dimensions of being increased for some countries and decreased for others. There has been a relentless pressure put on the Fed to lower interest rates, which finally did materialise even though economic theory would raise a red flag. There have been reverberations in India on the market, and there is a nervous unease when one looks at the stock market.

Let us start with India. Since February, the RBI stance has been clear, and the repo rate has come down by 100 bps. This is a critical indicator for banks, as a lower repo rate gets translated to lower lending rates on approximately 60% of loans. This also forces banks to lower their deposit rates to maintain their interest margins. Hence, deposit rates for savers have climbed downwards this financial year by a little more than 100 bps. The interest rate on a deposit has come down from close to 8% for, say, a year to even less than 7% for most tenures. Savers must take a call on their options when it comes to deploying their funds.

The stock market is important because, since the last 5 years, retail interest has been quite high. Those who are more inclined to taking risks have moved to investing directly in equity. And those who are moderately risk averse but still willing to take a chance are into mutual funds. Even today, several debt mutual funds show a return of 7-8% over a period of 3 years. In the case of equity, it could be an average of 12-14% over a period of 10 years, with a definite possibility of two years in this bracket registering negative returns. Therefore, one needs to be prepared for a long haul.

The interesting part here is that corporate profits have not been even across the board. For the first two quarters, turnover growth has been around 5-6%, while profits have grown by 7-8%, with some sectors witnessing double-digit growth. Yet, stock prices have risen. For the perspicuous investor, the stocks could look overvalued, with the price-to-earnings ratio often at exaggerated levels of above 30.

Now, foreign portfolio investors have been whimsical. In October, they were positive in both equity and debt, which has sparked enthusiasm in the market. This comes at a time when it looks like there will be a deal with the USA which will lead to lower tariffs. The US rates are also down, which makes the differential narrower for Indian bonds. The prospects of the GDP growth being maintained at above 7% in the next few years are high. This has made the Indian market look very good again.

In parallel, a development that has been witnessed is the booming IPO market. The IPO market has flourished this year, with several companies raising money in the market. The interesting part is that almost 80% of the issuances are listing at a premium, with most retail investors exiting with a profit. While this is not the best scenario from the point of view of developing a market, it is clearly a case of investors looking for quick returns. This has been the case in the last few years, which has led to this chase for quick returns.

Ideally, individuals need to do some kind of portfolio allocation across alternatives to ensure that the risk taken is under control. While the senior gentry still stick to bank deposits or special schemes for senior citizens, the younger lot are clearly pitching for higher returns on investment. This conversion of savers to investors is a phenomenon which has caught on quite rapidly, changing the risk profile of households.

Simultaneously, there has been a rise in the debt profile of households where loans are being taken mainly for the purchase of automobiles, followed by housing, based on the age profile again. Younger professionals in the age group of 25-35 prefer to borrow to buy vehicles or use for experiences like travel and tourism. This is another changing facet of the spending and saving pattern of new India. In fact, given the fact that the youth tend to change jobs and location, housing is lower down the pecking order when it comes to borrowing. This becomes more important for those in the age group of 35-50 years.

The main issue from the point of view of economic growth in the future is drawing the right balance between consumption and savings and, within savings, pure savings and investment. When money is saved in a bank deposit, there is a clear route for the money. It goes for lending or is invested in government paper. However, once it enters the market, the route is more nebulous. The IPOs may not necessarily be linked with investment and often are used for repaying debts or making profits by exiting the venture. Secondary market transactions lead to the exchange of money between different market participants and are not used for investment per se. Money put in mutual funds could again be used for secondary market transactions in debt and equity, and hence may not add to aggregate investment.

This is typical in a country where financial literacy spreads and money is used for different purposes. Debt is no longer considered to be bad, as it helps foment consumption. Ideally, a balance needs to be drawn, but it must come from within and cannot be enforced from above.

The author is Chief Economist, Bank of Baroda and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal.