Are Indian investors really shifting from bank FDs to mutual funds? Here’s what Granger and cointegration regression tests reveal

There is an argument that even if individuals are moving deposits to mutual funds, the money must finally rest with banks as it will only mean transfer from a retail to a corporate account. In continuation of this logic, it is argued that deposits can never go down as any shift will only mean change in nomenclature of deposits in terms of ownership. There is merit in this argument and this could possibly the reason as to why we have not been able to determine a causal relationship in this analysis. Also both the variables have been increasing during this period and hence a negative relation is not visible even though the pace of growth in deposits has slowed down. Interestingly RBI data shows that on an annual basis the share of mutual funds in total deposits is insignificant and has not changed over time.

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A statistical exercise is conducted to show whether some degree of crowding out persists between MF and BD or not. Here it is important to mention that we have performed a couple of iterations.

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Time period considered in our analysis runs from Oct’99, based on the availability of data, with a total number of observations at 298. To examine the causality, we have performed the Granger Causality test. The prerequisite of series being stationary has been fulfilled and the series turns out to be stationary in its first difference. Thus, as per results, Mutual fund does not Granger Cause Bank Deposits, but Bank Deposits does Granger Cause Mutual fund. To further check whether the relationship is spurious or not, we have used the concept of cointegration. Here, as seen before performing Granger causality test that both BD &MF ~I (1) [Integrated of order 1] and the error term is I (0) i.e. stationary.

However, OLS estimates give hint of spurious regression as t-statistic is very high, R2>Durbin Watson stat (Appendix: 2). To further establish whether the series are cointegrated or not, we run the cointegration regression and Engle Granger and Phillips Ouliaris tests, both of which do not confirm that series are cointegrated.

Next, we divide it into two periods (FY14-19) and FY20 onwards, especially to reflect the changing pattern of household’s preferential savings instrument. The rationale of choosing the break is on account of faster pace of accretion of AUMs of MFs post Covid.

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The results of Granger causality for both the periods show no causality between MF and BD and the other way round as well, after checking the prerequisite of stationarity. This contrasts with what we have seen for the full series, where one way causality turned out to be true, which was seen to be spurious later in the cointegration test.

In conclusion it is still not clear that there is a causal relationship statistically between growth in deposits and mutual funds. Being a more recent phenomenon, the long-term time series did not show significant trend for mutual funds in the past and hence this can be a reason for the absence of significant relations between the two. In terms of plain elasticities, there has been a lower number in the period starting FY20 when mutual funds gained in ascendency.
It would need to be seen whether this tendency will be sustained as a large part of the migration to the equity market has been due to a booming stock market.

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