RBI Working Paper Series No.13 for September 2011

The Reserve Bank of India today placed Working Paper titled "Long Run and Short Run Saving-Investment Relationship in India (rbi.org.in/scripts/PublicationsView.aspx?id=13842) " by Bichitrananda Seth. Savings are the backbone of investment, wherein higher savings lead to higher growth in an economy with conducive macroeconomic environment and a developed financial system. This Working Paper examines short and long run relationship between gross domestic savings and investment as well as corporate sector savings and corporate sector investment in India using Engel Granger Cointegration test for the period between 1980 and 2008.

From the empirical analysis, the paper concludes that the gross domestic savings and investment are cointegrated. This underlines the point that the domestic investment is mostly financed by domestic savings. In the short run, changes in domestic savings effect domestic investment. Further, their findings show that corporates generate their savings from the retained earnings. Hence, any downward disturbance in retained earnings will reduce their savings and investment in the short run.

According to the findings of the paper, there is a need for strengthening the financial system in order to effectively channelize household savings for enhancement of capital formation in India.

The Reserve Bank of India introduced in April this year, a ‘RBI Working Paper Series’ (RBI - WP) to provide a platform to the Reserve Bank Staff for presenting their research studies as well as to receive feedback from informed researchers.

The views expressed in all the research publications of the Reserve Bank, including the RBI Working Papers Series, do not necessarily reflect the views of the Reserve Bank and as such should not be reported as representing the views of the Reserve Bank of India.

Feedback, if any, on the papers could be addressed to the respective authors of the research studies.

Ajit Prasad
Assistant General Manager

Press Release : 2011-2012/563