Households Rebuilding Savings RBI

Recently, the Reserve Bank of India (RBI) Deputy Governor, at the Financing 3.0 Summit organized by the Confederation of Indian Industry (CII), highlighted the trend of Indian households rebuilding financial savings post-pandemic. This shift has significant implications for the broader economy and financial system.

Current Trend in Household Savings

1. Recovery of Household Savings:

   1. Post-Pandemic Trends: Household net financial savings dropped significantly from 2020-21 levels due to the unwinding of pandemic-era savings and a shift towards physical assets like real estate.
   2. Recent Trends: Households are now restoring financial savings, with financial assets rising from 10.6% of GDP (2011-17) to 11.5% (2017-23, excluding the pandemic year).
   3. Physical Savings: Physical savings have increased to over 12% of GDP post-pandemic, though still below the 16% recorded in 2010-11.

2. Future Prospects:

   1. As incomes continue to rise, financial savings are expected to increase, potentially reaching around 15% of GDP, similar to early 2000s levels.

Impact of Household Savings on the Economy

1. Interest Rates:

   1. Changes in household savings can influence monetary policy and interest rates. Lower financial savings might lead to higher interest rates to encourage saving, and vice versa.

2. Enhanced Lending Capacity:

   1. With increasing financial strength, households are expected to become primary net lenders, filling the financing gap for other sectors as corporate borrowing needs rise.

3. Corporate Sector Borrowing:

   1. Decreased net borrowings by the corporate sector might rise with increased capital expenditure (capex), requiring household savings to support economic growth and investment.

4. Economic Stability:

   1. Higher physical savings can enhance economic stability by diversifying investment portfolios, though it may limit liquidity.

5. Implications for External Financing:

   1. Rising domestic savings may reduce the need for external financing, but external debt sustainability remains a priority. Changes in external financing composition could occur as the economy adapts.

6. Public Sector’s Role:

   1. The public sector's net dissaving has moderated but remains a net borrower, highlighting the need for continued fiscal policy support.

What are Household Savings?

1. Components:

   1. Net Financial Savings (NFS): Calculated after deducting financial liabilities from gross financial savings (GFS).
   2. Gross Financial Savings (GFS): Includes currencies, bank and non-bank deposits, insurance, provident and pension funds (e.g., Public Provident Fund), shares and debentures, claims on government (small savings), and other financial assets.
   3. Physical Savings: Primarily consists of residential real estate and machinery/equipment.

2. Household Savings to GDP Ratio:

   1. Includes net financial savings, physical savings, and gold/ornaments. A growing trend is observed towards riskier financial assets and physical assets like real estate.

3. Pandemic Impact:

   1. During COVID-19, households saved more due to limited spending opportunities, resulting in high financial savings (Rs 23.3 lakh crore in 2020-21). Post-pandemic, there has been a shift from financial assets to physical assets, reducing net financial savings.

4. Recent Trends:

   1. Net financial savings fell to Rs 14.2 lakh crore in 2022-23 from Rs 17.1 lakh crore in 2021-22. Physical asset savings surged to Rs 34.8 lakh crore, with gold savings at Rs 63,397 crore in 2022-23.

5. Household Debt:

   1. Defined as liabilities requiring payments of interest or principal in the future. Increased household debt, influenced by high EMI payments and lifestyle expenditures, impacts overall savings.

Initiatives Related to Household Savings

1. Sukanya Samriddhi Account Scheme
2. Senior Citizens’ Savings Scheme
3. Kisan Vikas Patra Scheme
4. Mahila Samman Savings Certificate
5. Employees Provident Fund (EPF)
6. National Pension System (NPS)
7. Public Provident Fund (PPF)
8. National Savings Certificate (NSC)
9. Post Office Monthly Income Scheme (POMIS): Allows investments with a 5-year lock-in period, early withdrawal with a penalty, and is exempt from Tax Deduction at Source (TDS).

Conclusion

The evolution of household savings in India reflects a dynamic interplay between economic conditions, policy measures, and changing household behaviors. Post-pandemic, there is a notable recovery in financial savings, though physical asset investments remain high. This shift impacts monetary policy, lending capacity, and economic stability. Initiatives like the Sukanya Samriddhi Account Scheme and EPF continue to play a crucial role in fostering savings. Moving forward, addressing the challenges of high household debt and ensuring effective policy support for both financial and physical savings will be essential for sustaining economic growth and stability. Balancing these factors will help in navigating future economic uncertainties and promoting robust financial health among households.

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