According to a working paper released by the Reserve Bank of India (RBI) on Tuesday, when future inflation expectations are high, households change their savings portfolio with respect to bank deposits.
The paper titled ‘Taking Cognition of Households’ Inflation Expectations in India’ states that inflation expectations play an important role in regulating the consumption behavior and resultant savings of households.
This paper is written by Devendra Pratap Singh, Aditya Mishra and Poornima Shaw of RBI. The authors said the findings of the paper belonged to the authors and not the RBI.
Particularly in the case of a developing economy, it is desirable for households to save in financial instruments such as debt or equity, which can be further used for production-enhancing activities, he said in the paper.
If households expect inflation to rise in the medium term and suspect low returns due to low real interest rates, it may be better for them to invest in precious metals, jewelery and similar items than save in fixed deposits. Yes, they said.
The authors noted that similar to India, inflation expectations are biased and not as efficient in other countries, such as the US, England, Japan, New Zealand, South Africa, the Czech Republic, the Philippines and Russia.
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