The Great Indian Savings Puzzle

India’s savings rate rose from 13% of GDP in 1970 to 38% of GDP in 2008 before steadily declining to 30% of GDP by 2019. India’s savings trajectory follows a hump-shaped pattern, peaking during the Great Recession (2007–2009). We build a monetary-growth model that highlights the role of declining inflation post-2009 in explaining the hump shape in the savings rate. Falling inflation boosts future wealth, inducing households to increase consumption while lowering future savings. Consumption smoothing and risk aversion lead to higher consumption and lower savings in the initial periods as well. Consequently, household savings are low but rising in the 1990s, peaking alongside inflation in 2008, and declining thereafter. The fit improves when we allow for two types of agents: Ricardian and Rule of Thumb. Our model predicts a dynamic association between inflation and household savings that mimics the hump-shaped savings pattern observed in India and some other economies.