Risk Adjusted Elasticities of Substitution, Household Financial Asset Holdings and Financial Disintermediation in India – Evidence From a Flexible Functional Form Approach

This paper quantifies the strength and magnitude of financial disintermediation in India, that is generally believed to have occurred after the financial sector reforms, by analyzing the household financial savings pattern over the period 1961-2015. Using a globally flexible functional form namely, the Fourier flexible form, for the sub-utility function for financial assets, the estimated elasticities of substitution do reveal a strong evidence of financial disintermediation, especially over 2001-2014. A strong case to abandon simple sum aggregation of assets can also be made, given the volatilities in own rates of returns and wild swings in estimated elasticities of substitution