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RBI flags shift in retail investments towards alternatives amid funding challenges

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The Reserve Bank of India (RBI) highlighted a significant shift in retail investment preferences towards alternative investment avenues during its 50th Monetary Policy Committee (MPC) meeting on Thursday, August 8. This trend has presented new challenges for banks, particularly as loan growth continues to outpace deposit growth.

The RBI observed that retail customers are increasingly gravitating towards alternative investment options such as Infrastructure Investment Trusts (InvITs), Real Estate Investment Trusts (REITs), and portfolio management services (PMS). These alternatives have become popular due to their potential to deliver higher returns compared to traditional fixed deposits (FDs) offered by banks.

“This shift has put banks in a difficult position on the funding front, leading them to rely more on short-term non-retail deposits and other liability instruments to meet the growing credit demand,” the RBI noted.

RBI Governor Shaktikanta Das expressed concern over the growing dependence on non-retail deposits, cautioning that it could expose the banking system to structural liquidity issues. He urged banks to focus more on mobilizing household financial savings through innovative products and services, capitalizing on their extensive branch networks.

Market analysts suggest that alternative investments have gained traction because of their superior returns compared to bank FDs. In contrast to the 9% interest rates offered by some small finance banks, stock market returns have outperformed significantly. For instance, in the calendar year 2023 (CY23), the Sensex gained around 19%, while the midcap and small-cap indices surged by 27.3% and 25.6%, respectively. Some stocks in the mid and small-cap segments even posted triple-digit gains.

Despite the challenges posed by these trends, the RBI reassured that the Indian financial system remains resilient. The central bank pointed to broader macroeconomic stability and a well-capitalized, unclogged balance sheet as indicators of the system’s strong risk absorption capacity.

The increasing allure of alternative investments is a testament to the evolving investment landscape in India. While the shift presents challenges for banks, it also underscores the growing sophistication of retail investors. The government’s role in balancing the attractiveness of bank deposits and alternative investments will be crucial in shaping the future of the Indian financial market.

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