The decision by Reserve Bank of India governor Raghuram Rajan to increase the repo rate by another 25 basis points was widely anticipated. It is also well known that the Indian central bank is concerned about the rebound in inflation in recent months. The inflation expectations of households are at their highest level in five years.

What seems to have attracted less attention is the fact that Rajan has also been saying that high consumer price inflation has led households to shift from financial savings to other avenues such as real estate and gold. “It is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth,” Rajan said in his Tuesday policy statement.

That should not be seen as a bolt from the blue. Rajan has made a similar point on at least two previous occasions.

First, this is what he said as part of his first public statement after taking charge of Indian monetary affairs on 4 September: “Households have expressed a desire to be protected against CPI inflation. Together with the government, we will issue Inflation Indexed Savings Certificates linked to the CPI New Index to retail investors by end- November 2013.”

Then he made a similar point to justify higher interest rates when he made his first monetary policy statement on 20 September: “Inflation is high and household financial saving is lower than desirable.” The second reason for tighter policy has got less attention than it deserves.

Rajan is on a strong wicket here. High inflation has eroded financial wealth. Indians have restructured their savings portfolios in recent years because the returns on financial assets such as bank deposits have been lower than the consumer price inflation. They have shifted money to real estate and gold to hedge their portfolios.

The numbers tell the story in stark detail. The financial savings of households as a proportion of gross domestic product have declined sharply from 11.6% to 8% in the five years from 2007-08 to 2011-12, the last year for which such data is available.

The stock of financial savings by households has almost been stagnant in recent years because of the shift to real estate and gold—which means that Indian companies could face borrowing constraints when the economic cycle turns.

Higher real interest rates on financial assets are a useful way to convince ordinary Indian savers to move money back into the banking system, as inflation comes down and nominal interest rates rise.

The upshot: higher interest rates may hurt growth right now but will actually give it a firm basis in the future if financial savings begin to grow once again.