Household savings slide in third quarter amid Covid-19 pandemic cloud

Household financial savings moderated in the third quarter (Q3) of 2020-21 (FY21) for the second consecutive quarter, driven by a significant weakening in household financial assets, which more than offset the moderation in household financial liabilities.

Preliminary estimates released by the Reserve Bank of India (RBI) showed that household financial savings were at 8.2 per cent of gross domestic product (GDP) in the Q3FY21.

The financial savings were recorded at 10.4 per cent in the second quarter (Q2), stood at a healthy 21 per cent in the first quarter (Q1) of FY21, which was the quarter before the pandemic lockdown started.

In the nine months taken together, the financial savings pattern does not look so bad, as Q1 showed a healthy growth in financial savings, observe economists.

According to the RBI data, a household’s net financial savings to GDP ratio rose to at least a 20-year high of 12.5 per cent during the first nine months (9M) of FY21. The ratio was 8 per cent in 2019-20 (FY20) at a two-decade low of 7.1 per cent in 2018-19. The previous high was 12.1 per cent in 2009-10.

The rise in the ratio was largely due to a sharp jump in a household’s gross financial savings last fiscal year.

According to the RBI data, household gross financial savings were up 45.4 per cent year-on-year (YoY) during the April-December 2020 period to Rs 21.78 trillion, from Rs 14.98 trillion a year ago. In the same period, household liabilities were up 8.6 per cent to Rs 4.26 trillion, from Rs 3.92 trillion in 9MFY20.

A slower growth in household liabilities led to a sharp jump in household net savings or assets last fiscal year.

Household net savings were up 58.4 per cent YoY in 9MFY21 to Rs 17.52 trillion – up from Rs 11.06 trillion a year ago.

The quarterly fall, however, may mean that during the pandemic period, people’s earnings were hit, at the same time, they pared their liabilities actively to stay nimble-footed in an emergency.

It is interesting to note that at the end of Q3, the currency with the public also grew sharply at 22.7 per cent.

The household savings data, juxtaposed with the high currency with the public data as on January 1, indicates that households were under stress cut down their liabilities, as well as were restrained by lower income due to the pandemic. The currency with public growth has now fallen to 13.1 per cent, as on June 4, which is its normal growth rate.

The ratio of household (bank) deposits to GDP declined to 3 per cent in Q3, from 7.7 per cent in the previous quarter.

“Despite higher borrowings from banks housing finance companies, the flow in household financial liabilities was marginally lower in Q3FY21, following a marked decline in borrowings from non-banking financial companies,” the RBI said in a statement.

“The dip in household financial savings reflects a significant draw-down on deposits, as households faced balance-sheet stress during the lockdowns. However, there is also a composition shift happening within the household financial savings basket, with more funds being saved in the retirement corpus. This trend is visible from the last two years,” said Soumya Kanti Ghosh, chief economist of State Bank of India group.

Meanwhile, the household debt to GDP ratio has been increasing steadily since end-March 2019, the RBI observed. It rose sharply to 37.9 per cent at the end of December 2020, from 37.1 per cent at the end of September 2020.

Analysts attribute this to a decline in discretionary spending by households in the first half of FY21 due to the lockdown that has led to closure of most non-essential economic activity.

This explains a sequential decline in household net financial savings in Q2 Q3 of FY21 after the end of the first phase of lockdown.

In 9MFY21, however, the rise in household financial savings was largely absorbed by bank deposits, life insurance policies, mutual funds (MFs), equity markets, currency holdings.

According to the RBI data, bank deposits were up 62.5 per cent YoY, while household investment in MFs equity were up 49 per cent YoY in 9MFY21.

In comparison, life insurance funds were up 36.4 per cent, while currency holdings were up 158 per cent in 9MFY21.

Analysts say the jump in household financial savings their deployment in MFs equity markets could partly explain the continued bullishness in equity markets. At the same time, a surge in bank deposits may explain the softness in interest rate on bank deposits.