Mint explainer: How inflation is hurting India's household financial savings

How inflation is hurting India's household financial savings
How inflation is hurting India's household financial savings


  • The net financial assets of households have consistently declined from 11.5% in FY21 to 7.2% in FY22

India’s household savings have touched decadal lows of 5.1% in FY23, showed data released by the Reserve Bank of India (RBI), as rising inflation forces people to use savings for consumption. The net financial assets of households have consistently declined from 11.5% in FY21 to 7.2% in FY22. Mint takes a look at what this means.

Household financial savings over the years

Household savings are arrived at by subtracting aggregate financial liabilities from total financial assets. Liabilities of households include loans from banks, non-banking financial companies (NBFCs), among others, while assets comprise deposits with banks and other financial institutions, life insurance, provident funds, currency and other investments. 

At 5.1% of gross domestic product (GDP) in 2022-23, the net financial assets of Indian households are the lowest in at least 23 years, according to an analysis of RBI data by Motilal Oswal. The pandemic year of FY21 saw a surge in household savings in India when it touched a peak of 11.5%. To be sure, India was not an outlier and as per an International Monetary Fund (IMF) blog from November 2021, many nations saw an increase in household savings that were fuelled by a combination of lower consumption and precaution.

Curtailing savings to spend during high inflation

Mint reported in September 2022 how Indian households’ savings rate fell to the lowest in five years, with people using their savings to indulge in a post-pandemic spending spree. A rise in inflation has also curtailed people’s purchasing power. At 6.83% in August, inflation as measured by the consumer price index (CPI) has stayed above RBI’s flexible inflation target of 2-6% for two consecutive months. In its August monetary policy, RBI has projected CPI inflation at 5.4% in 2023-24.

Breakup of financial savings

On an absolute basis, net financial assets showed a decline in 2022-23 and stood at 13.8 trillion, as against 17 trillion in 2021-22. The gross financial assets of households increased 14% year-on-year (y-o-y) in FY23 to 29.6 trillion. Financial liabilities have grown a staggering 76% in the same period, outpacing the growth in assets and leading to lower net financial savings as a percentage of GDP.

Robust credit growth to retail borrowers has ensured that borrowings from banks rose 57% y-o-y even as bank deposits rose 32%. Retail loans grew 21% in FY23, significantly higher than 13% in the previous fiscal. Led by increasing demand for mortgages, retail loans have been fuelling credit growth over the past few years, making up for sagging corporate loan demand. It has shown little signs of ebbing despite the 250 basis point (bps) repo rate by RBI between May 2022 and February this year.

Consumption demand in the economy

Defined as the expenditure incurred by the resident households and non-profit institutions serving households on final consumption of goods and services, private final consumption expenditure is an indicator of consumption. As per a recent report by SBI Caps, private final consumption expenditure grew 6% in Q1 of FY24, up from 2.8% in the sequential quarter.

In an article in RBI’s October bulletin, authors looked at the determinants of household borrowings. The article said that owing to the development objectives, access to affordable credit for the household sector can alleviate the liquidity constraint, enabling them to smoothen their consumption. While household borrowing plays a critical role, excessive leverage beyond sustainable levels, the article said, may impact the health of the financial system adversely causing economic disruptions.

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