As Covid curbed spends, home savings surged to 21% of GDP in Q1

The propensity of households to save appears to have risen significantly during the pandemic as they have been unable to consume up to their normal levels and have raised their precautionary savings, according to the RBI’s latest monthly bulletin.

Preliminary estimates show a jump in household financial savings to 21.4 per cent of GDP in the first quarter of FY21 (April-June), up from 7.9 per cent in the first quarter of the previous fiscal and 10 per cent in the March 2020 quarter.

According to the RBI report, households would have been forced to save more, as their consumption basket would have comprised a limited number of items. Also, they may have raised their precautionary savings due to uncertainty about their future incomes, in light of job losses.

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While a significant reduction in nominal GDP has also contributed to the rise in household financial savings-GDP ratio, in absolute terms household financial savings have increased. In the first three quarters of FY20, household financial savings stood at between ₹3.3-4.3-lakh crore and went up to ₹5.32-lakh crore in the fourth quarter. Owing to seasonal factors, household financial savings generally peak in the fourth quarter but moderate in the first quarter.

However, in the April-June quarter this year, household financial savings shot up to ₹8.16-lakh crore. Household savings is a function of flow of financial assets and liabilities (former less the latter). The significant increase in household financial assets and moderation in financial liabilities led to an increase in household savings in the first quarter of the current fiscal.

Flow of financial assets increased to ₹8.27-lakh crore in the June quarter, more than double the level seen in the same quarter last year ( ₹3.9-lakh crore) and up from ₹7.1-lakh crore in the March quarter. On the other hand, flow of financial liabilities shrunk to ₹11,000 crore in the June quarter, from ₹1.8-lakh crore in the March quarter.

Increased flows into MFs, insurance

According to the RBI report, the increase in household financial assets was led by significant increase in the households’ holdings of mutual funds, insurance products and currency.

With bank deposit rates plummeting sharply and equity market scaling new highs after the initial volatility in March, people appear to have made a beeline for mutual funds in the first quarter ― household savings in mutual funds increased to 1.7 per cent of GDP in the June quarter, from (-) 0.9 per cent in the March quarter.

Increased awareness of protection and life risk, in turn led to increase in subscription of life insurance products. Savings in insurance products increased to 3.3 per cent of GDP in the June quarter, from 0.7 per cent in the March quarter.

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The significant increase in currency (5.4 per cent of GDP in June quarter vs 3 per cent in March quarter) was because of the ‘dash to cash’ behaviour brought upon by the pandemic, according to the RBI report.

While flow into financial assets increased, financial liabilities of households contracted, with decrease in loans from banks. Banks have been cautious in extending loans and so have NBFCs. Subdued demand for real estate and passenger vehicles have also impacted the borrowing needs of households.

Global trend

The unprecedented increase in household financial savings has not been unique to India. For instance, in the US, the personal saving rate rose by 20.7 percentage points (to 33.6 per cent of disposable income) in April 2020 from 12.9 per cent in March 2020, and in the UK, household savings ratio has increased to 29.1 per cent of disposable income in Q2 of 2020 from 9.6 per cent in Q1 of 2020.

The trend of higher than usual household financial savings can persist for some time till the pandemic recedes and consumption levels get normalised, according to RBI.

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