BackLow interest rates drove Indian households towards physical assets, says SBI Ecowrap report
Low interest rates in India during the pandemic led to a shift in household savings from financial to physical assets, says SBI Research
PremiumA low-interest rate regime in India during the pandemic resulted in a "paradigm shift" of households' savings from financial to physical assets, according to a report by SBI Research.
In its study, it found that 55 per cent of the retail credit to households in the last two years has gone to housing, education, and vehicle purchases.
The report said arguments that the household savings fell to a 50-year low were “completely misleading". It backed its statement by saying household savings must be looked into as a sum total of physical and financial savings and not in isolation.
The net financial saving of the household sector – the most important source of funds for the two deficit sectors, namely, the general government sector and the non-financial corporations – moderated to 5.1% of GDP in FY23 from 11.5% in FY21 and 7.6% from FY20 (pre-pandemic). It has been said that it fell to 50 50-year low, however, this is completely misleading as household savings must be looked into as a sum total of physical and financial savings.
“Financial liabilities jumped ₹8.2 trillion since the pandemic, outpacing the increase in gross financial savings at ₹6.7 trillion, thus explaining the fall in household net financial savings by ₹1.5 trillion / 2.5% of GDP. On the asset side of households, there was an increase of ₹4.1 trillion in insurance and provident and pension funds," SBI Report said.
It further added that there is a significant long-run relationship between housing loans and household savings in physical assets. It argued every Re 1 increase in housing loans has resulted in a ₹2.12 increase in household savings in physical assets for the 14-year period ended 2021-22.
“In fact, savings in physical assets which accounted for more than two-thirds of household savings in 2011-12, had declined to 48 per cent in 2021-21. However, the trend is again shifting and the share of physical assets is expected to reach 70 per cent level in 2022-23, due to a decline in the share of financial assets," the research report said.
SBI Research believes that the shift to physical assets could have been also triggered by a recovery in the real estate sector led by the increase in property prices.
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