Household savings decline in Sep quarter

1 min read 19 Mar 2021, 06:48 PM IST Shayan Ghosh

Household financial savings stood at 10.4% of the nation’s GDP in the July-September period of FY21, down from 21% of the GDP in Q1 of FY21
The RBI paper pointed out that the pick-up in private consumption is reflected in various high frequency indicators for the second quarter

Mumbai: The Reserve Bank of India (RBI) on Friday said that the initial uptick in household savings seen in the June quarter has waned substantially in the next three months on the back of rising consumption and higher borrowing.

Household financial savings stood at 10.4% of the nation’s gross domestic product (GDP) in the July-September period of FY21, down from 21% of the GDP in Q1 of FY21. It is estimated to have further declined in the December quarter as consumption intensified.

This decline, it said, is also driven by the increase in household borrowings from banks and non-bank financiers accompanied by a moderation in household financial assets in the form of mutual funds and currency. The household debt-to-GDP ratio rose sharply to 37.1% in Q2 from 35.4% in Q1.

It pointed out that the real GDP contraction of 24.4% in Q1 of FY21 was accompanied by household financial savings rate of 21%, while a moderation in GDP contraction to 7.3% in Q2 coincided with the reduction in household financial savings rate to 10.4% of GDP, which was still higher than the 9.8% of GDP seen in the same period of the previous year.

Interestingly, published as part of RBI’s March bulletin, the paper said that the inverse relation between household financial savings rate and GDP growth may sound counter-intuitive, but studies have shown that households tend to save more during the economic slowdown and greater income uncertainty.

“While households’ deposits and borrowings picked up, their holdings of currency and savings in mutual funds moderated. Increased household consumption, particularly its discretionary component, could be attributed to resumption in economic activity following the easing of the lockdown," it said.

This article on estimates of household savings has been written by Sanjay Kumar Hansda, Anupam Prakash, Anand Prakash Ekka, and Ishu Thakur of the national accounts analysis division, department of economic and policy research, RBI. It was accompanied by the usual disclaimer that the views expressed in the article are those of the authors and do not represent the views of RBI.

“With the gradual reopening of the economy, households switched from an essentials-only spending pattern to discretionary spending, which resulted in the reversal of household financial savings from the peak it attained in Q1 FY21," it said.

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ABOUT THE AUTHOR

Shayan Ghosh

Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.