From the Viewsroom

What’s behind the savings spike?

Aarati Krishnan | Updated on November 17, 2020

Could be fear of job losses and lower spending during lockdown

Early estimates by the RBI suggest that Covid-induced uncertainties prompted Indian households to make a dash for cash. Incremental savings of households spiked to 21.4 per cent of GDP in Q1 FY21 from 7.9 per cent in the same quarter last year and 8.3 per cent for the full year. The timing of the increase is unusual, as Q4 usually sees a savings peak. While it would be tempting to attribute this increase to the contraction in GDP (23.9 per cent fall in Q1), absolute savings showed a jump too, with households doubling their net financial savings to ₹8.16 lakh crore in the quarter compared with ₹3.86 lakh crore in Q1 FY20.

While any spike in household financial savings is cause for cheer in a capital-starved economy like India, on this occasion it pays to look the gift horse in the mouth. For one, there appears to be a forced component to these savings, which could evaporate once the Covid hit to the economy wanes. The RBI conjectures that this unseasonal savings spike was prompted both by the lack of discretionary spending avenues for affluent households during the lockdown and fears of job losses for low- and middle-income folk. Neither of these present enduring reasons to invest.

Two, despite deep rate cuts, bank deposits hogged the bulk of these flows, expanding by 11 per cent year on year. But banks didn’t deploy the new-found riches in lending. With credit growth at just 6.2 per cent, they’ve parked significant sums in government bonds Three, while deposits, mutual funds and insurance products did benefit from the savings surge, hard currency remained a preferred avenue accounting for a fourth of the savings (5.4 per cent of GDP). Whether this yen for cash represents a disenchantment with low interest rates or a mistrust of financial products in general, is hard to decipher.

The data makes it clear that if the Indian economy is to retain this unexpected savings bonanza and channel it into productive uses, policymakers must undo the raw deal that they’ve handed Indian savers by orchestrating negative real rates, amid rising inflation rates.

Published on November 17, 2020

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