When expectations around future inflation are on the higher side, households change their savings portfolio with respect to bank deposits, according to a working paper released by the Reserve Bank of India (RBI) on Tuesday.
Inflation expectations play a vital role in regulating households’ consumption behaviour and consequent savings, said the paper titled ‘Taking Cognisance of Households’ Inflation Expectations in India’.
The paper is authored by Devendra Pratap Singh, Aditya Mishra and Purnima Shaw of the RBI. The findings of the paper are of the authors and not of the RBI, the authors said.
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Especially in the case of a developing economy, it is desirable for households to save in financial instruments like debt or equity, which can be used further into production-enhancing activities, they said in the paper.
If households expect inflation to pick up in the medium term and they suspect low returns due to low real interest rates, it may be preferable for them to invest in commodities such as precious metals, jewellery and the like, than saving in term deposits, they said.
The authors said that similar to India, inflation expectations are biased and not efficient in other countries too, such as the US, England, Japan, New Zealand, South Africa, Czech Republic, Philippines and Russia.
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