BackHouseholds turn cautious with spending even as economy rebounds faster: RBI data
The central bank’s internal nowcasting model predicts growth to return to positive in Q3FY21The economy is expected to have contracted by 8.6% in the September quarter, lower than what was initially estimated, says RBI
PremiumIndia's household financial savings rose to 21.4% of the gross domestic product (GDP) in the June quarter of current financial year up from 7.9% in the corresponding period last year, data released by Reserve Bank of India on Wednesday showed. While, the central bank internal ‘nowcasting’ model pointed to lower economic contraction than what was initially anticipated in the three months to September, RBI said that sharp increase in household savings is counter-seasonal and may be attributed to the Covid-19-led reduction in discretionary expenditure or the associated forced saving and the surge in precautionary saving despite stagnant/reduced income in its November bulletin.
It pointed out that while the key determinants of household financial savings, in particular, income and interest rate, changed significantly during the June quarter, there were also reported shifts in the consumption pattern of non-essential items.
What the extra savings does is it gives people enough room to spend once economic conditions and more importantly the sentiment revive.
“We are upbeat on consumer demand with a positive start to this festive season with a 30% growth across air conditioner, refrigerator, washing machine and microwave categories over last year," said Suguru Takamatsu, Divisional Head CSD, CE, Panasonic India.
“It is possible that additional household savings and need for convenience when working from home has encouraged consumers to spend more in appliances that make life easier for them in current environment."
According to the report, the propensity of households to save may have risen significantly during the pandemic on two counts. Firstly, the households would have been forced to save more, being unable to consume up to their normal levels and secondly, they may have raised their precautionary savings due to uncertainty about their future incomes.
This is also reflected in the continued inflow of bank deposits despite lenders cutting interest rate on these instruments. In India, bank deposits and bank loans constitute dominant shares of around 56% and 80% of household financial assets and liabilities, respectively. To be sure, bank deposits have been growing at a much faster pace than credit owing to lack of demand for new loans as covid-19 has crimped people’s abilities to even service existing debt.
However, the increased flows to mutual funds, it said, seem to have been driven by low returns on bank deposits and the stock markets touching new peaks after initial volatility in March 2020 following the covid-19 outbreak.
“The trend of higher than usual household financial savings can persist for some time till the pandemic recedes and consumption levels get normalised," the bulletin said.
Meanwhile, the economy is expected to have contracted by 8.6% in the September quarter, lower than what was initially estimated, the Reserve Bank of India (RBI) said on Wednesday.
“The index nowcasts GDP growth at -8.6% in Q2 of 2020-21, implying that India is likely to have entered a technical recession in the first half of 2020-21 for the first time in its history with two successive quarters of GDP contraction," it said. Nowcasting is the prediction of the present or the very near future of the state of the economy.
The monetary policy committee (MPC) said on 9 October that real GDP growth in 2020-21 is expected to be negative at -9.5%, with risks tilted to the downside. It had predicted the economy will shrink 9.8% in Q2; 5.6% in Q3; and will turn positive at 0.5% only in Q4.
The central bank’s internal nowcasting model now predicts growth to return to positive in Q3FY21, ahead by a quarter of the forecast provided in the resolution of the monetary policy committee cited above.
“At a time when global economic activity is besieged by the outbreak of the second wave of covid-19, incoming data for the month of October 2020 have brightened the near-term outlook for the Indian economy and stirred up consumer and business confidence," it said.
However, it cautioned that there are formidable downside risks confronting the prospects of the recovery, with the unrelenting pressure of inflation being the foremost. The estimates of the National Statistical Office (NSO) that are expected at the end of November will formally bear out the extent of improvement that occurred in the quarter gone by.
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