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With $200 bn in extra savings, lockdown boosts household savings to 20-yr high: Report

Excess cash with banks averaged Rs39,700 crore ($6.2 billion) last week, compared to a peak of more than 5 trillion rupees in March, according to Bloomberg Intelligence India Banking Liquidity Index. Photo: Hemant Mishra/Mint
Excess cash with banks averaged Rs39,700 crore ($6.2 billion) last week, compared to a peak of more than 5 trillion rupees in March, according to Bloomberg Intelligence India Banking Liquidity Index. Photo: Hemant Mishra/Mint

Surprisingly, a vast portion of this savings is in cash only, which soared by a whopping 135% during the lockdown months, a report by UBS said, adding now household savings constitute as much as 58% of the gross capital formation while that of corporates is only 32%

MUMBAI : The pandemic-driven lockdown has a surprise winner in household savings that have been falling steadily between 2014 and mid-2019 but have scooped up a hefty $200 billion in extra savings — which is a 20-year high, according to a foreign brokerage report.

Surprisingly, a vast portion of this savings is in cash only, which soared by a whopping 135% during the lockdown months, a report by UBS said, adding now household savings constitute as much as 58% of the gross capital formation while that of corporates is only 32%.

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According to analysts at UBS Securities India Sunil Tirumalai and Dipojjal Saha, the slowdown in spending by the households through the lockdowns has resulted in $200 billion extra net savings in financial assets, which is as a percentage of GDP is close to the peak seen post-global financial crisis of 2008-09 and is still growing and is granular and broad-based, and not concentrated in the hands of the rich.

Bank deposits and insurance/pensions form 14% each of the total household savings, while 19% constitute claims on government and a whopping 135% are in hard currency.

Historically households have been funding a third of the capital formation of the rest of the economy. Overall financial surplus from households has remained steady for the last seven to eight years – before rising from mid-2019.

Household savings are still among the highest in peer countries, although it has come off over the last 20 years.

Since FY15, the household savings have been waning due to a host of factors, and one the main reason being a consumption growth driven by staples like processed food, health, education, clothing and daily commodities.

The UBS analysts think all this can unwind as the economy normalises and consumer confidence improves. Contrary to popular belief, these savings appear to be quite granular and broad-based and potential beneficiaries of this theme include consumer stocks and financials.

Savings flowing into equity markets have picked up, but remain less than 5% of the total savings. But this 5% is much higher than the FPI inflows in the past two years combined, which jumped 25% on-year in 2020.

Even without much help from asset appreciation, household financial wealth surged during the lockdown months. While government data come with over 15 months lag, the RBI gives it with 5-6 months lag. But UBS' real-time tracker shows that the overall quantum of savings has been rising since mid-2019 and surged in 2020 (peaked in June 2020 but still running higher than pre-pandemic level).

This coupled with a steady drop in household borrowings since the ILFS crisis has meant that their net financial surplus is almost at a two-decade high. As a result, wealth is also close to multi-decade highs - with negligible help from asset appreciation, the report said.

The sharp surge in retail deposits of banks, inflows into government's small savings schemes, insurance (new business premium and resilient persistency ratios), retail equity flows and rising cash in circulation are all evidence of higher financial savings by the households, it added.

At the same time, weak retail credit growth especially when NBFCs are seen along with banks suggest reduced borrowings flow. In a UBS survey in November 2020, as much as 70% of respondents said they saved more in 2020 than in 2019.

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