Property, stocks, bonds, and gold
A whopping two thirds of India’s household savings are in property and gold. The middle class dumps savings into property to store wealth. Rental yields have been driven down to around 2% in Delhi and 3.5% in Mumbai as of 2013.
A lot of the housing supply sits empty in the hands of middle-class savers. They won’t rent out property because they lack legal protection against tenants or illegal squatters.
Regular Indians face restrictions on taking their money outside of the country, so they tend to put savings into the Indian stock market for lack of options. Like property markets, Indian stocks pay paltry dividend yields of around 1.4%, according to the S&P BSE Sensex Index, which tracks India’s largest publicly-traded companies.
Foreigners have entered a stock market that was already expensive, attracted by the appeal of the new Prime Minister, Narendra Modi. Many have viewed him as an economic savior, and driven share prices even higher.
Meanwhile, bond yields on ‘risk-free’ government bonds are around 8%, which shows how compressed the yields on stocks and real-estate have become.
The rupee is losing ground against the dollar by around 9% per year. Indian price inflation runs at around 9% per year as well. Yields are clearly too low to maintain purchasing power.
Until recently, shares and property prices were rising in real terms, so that savers were compensated for low income on investments with rising valuations.
Recently, stock market prices have begun to weaken. The Sensex is down around 7% from its highs in late January 2015.
Without rising asset prices, stocks and real-estate fail to protect purchasing power for Indian savers. Bond yields are hovering around the inflation rate. This leaves gold as an alternative destination for savings.
Gold generates no yield. When yields overall are looking negative in real terms, the absence of yield is no longer a deterrent.
Besides the risk of falling asset prices, corruption runs rampant and the business environment is extremely challenging. You’re constantly under threat from fraud and extortion by authorities. This creates an additional need for keeping wealth out of harm’s way.
Indians aren’t speculators or ‘gold bugs.’ They buy gold because they’re willing to accept the absence of yields in order to preserve their wealth. Gold in rupees has not produced substantial returns yet, but Indians keep buying in order to move their wealth into a safer place.