The Reserve Bank of India’s (RBI’s) recently published Quarterly Estimates of Households’ Financial Assets and Liabilities shows the total amount of households’ gross financial assets fell from Rs141 trillion in September 2016 to Rs137 trillion by end-December 2016.
As a proportion of gross domestic product (GDP), the total amount outstanding in households’ financial assets fell from 95.2% of GDP in September 2016 to 89.2% by end-December 2016. At end-September 2017, the latest date for which the data is available, this metric was still below what it was in September 2016, as the chart shows.
Another way of looking at the numbers is to see the rate of growth in household financial assets. At end-September 2017, the growth in amounts outstanding in household financial assets was 9.7% compared to a year ago. At end-September 2016, this growth was much higher, at 17.1% year-on-year. Clearly, demonetisation led to a slowdown in the growth of household financial assets.
Compared to the rise in the outstanding amounts, the quarterly investment by households in financial assets is very volatile. The RBI report says, “Indian households are generally net savers and suppliers of financial resources for the rest of the economy. However, net financial assets of the households turned negative…in the third quarter of 2016-17, reflecting the transitory effects of demonetisation."
Demonetisation has led to a shift in the composition of households’ financial assets. By September 2017, currency holdings were down to 8.7% of GDP, compared to 10.6% in the pre-demonetisation quarter. The other clear trend is that households’ holdings of mutual funds have gone up, from 10.6% before demonetisation to 12.5% in September 2017. Indeed, the fall in currency/GDP is mirrored in the rise in mutual funds/GDP holdings of households. People have put their currency holdings to work in the financial markets, pushing them up.
RBI’s annual report showed that households’ gross financial savings as a proportion of gross national disposable income went up to 11.7% in 2016-17 from 10.9% in 2015-16. It’s now clear that the increase happened before the demonetisation shock.
The bigger issue is the fall in overall household savings. Data from the Central Statistics Office shows that overall household savings fell from 23.6% of GDP in 2011-12 to 19.2% in 2015-16. That indicates households are saving much less in physical assets.