As economy unlocks, discretionary spending eats into household savings

The Reserve Bank of India’s (RBI’s) preliminary estimates have revealed a substantial waning of the household financial savings rate to 10.4 per cent of GDP in the second quarter (Q2) of 2020-21 from the high of 21 per cent in the preceding quarter. This is because households switched from an ‘essentials only’ spending to discretionary spending with the gradual reopening and unlocking of the economy, it said.

Household debt to GDP ratio, which has been steadily increasing since Q1 of 2018-19, rose sharply to 37.1 per cent in Q2 of 2020-21 from 35.4 per cent in Q1 of 2020-21, the RBI said in its report on household financial savings. “Nonetheless, households’ financial savings rate for Q2 of 2020-21 ruled higher than that of 9.8 per cent witnessed in Q2 of 2019-20,” it said.

According to the RBI, the moderation in household financial savings has taken place despite an increase in their financial assets, as the flow of financial liabilities returned to positive territory on the back of loans from banks and NBFCs in Q2 of 2020-21. “Households’ financial savings rate might have fallen further in Q3 of 2020-21 with the intensification of consumption and economic activity.

It said household financial savings have moderated despite an increase in the savings in the form of deposits as household borrowings from banks and NBFCs have picked up. On January 22, 2021, the RBI proposed a revised regulatory framework for NBFCs based on a four-layered structure that would allow big NBFCs to be regulated like banks. When implemented, this may impact the distribution of household portfolio between banks and non-banks. A significant decline in household savings, in the form of currency and mutual funds, has also contributed to the moderation in household financial savings. Savings in the form of insurance funds have remained elevated, despite moderation in accretion in Q2 of 2020-21, the RBI said.

The reversion is mainly driven by the increase in household borrowings from banks and NBFCs accompanied by a moderation in household financial assets in the form of mutual funds and currency.

Increased household consumption, particularly its discretionary component, could be attributed to resumption in economic activity following the easing of lockdown. The reversal in household financial savings is corroborated by the lower surplus in the current account balance, the RBI said.

Although, the share of various instruments on the asset side of household portfolio has broadly remained unchanged during Q1 of 2018-19 to Q2 of 2020-21, the share of currency holding — which increased during Q1of 2020-21, reflecting flight to cash under extreme uncertainty — has reversed to its pre-pandemic levels with the resumption of economic activity in Q2.

It said aggregate bank deposits with scheduled commercial banks (SCBs) in India steadily rose and touched Rs 142.6 lakh crore at end-September 2020, an increase of Rs 4 lakh crore since June-end of 2020. In contrast, bank advances at Rs 102.7 lakh crore at end-September displayed a pick up by 0.2 per cent on a q-o-q basis, as against a contraction of 1.2 per cent in June 2020.

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