Precautionary Household Financial Savings Soared In Q1, Shows RBI Data 

Household financial savings rose to 21.4% of GDP in the first quarter of FY21, shows preliminary RBI data.

 A vegetable vendor counts Indian rupee notes on a road in Mumbai, India. (Prashanth Vishwanathan/Bloomberg)
A vegetable vendor counts Indian rupee notes on a road in Mumbai, India. (Prashanth Vishwanathan/Bloomberg)

Fearing the virus, a prolonged slump in the economy and locked in, Indians saved more than ever in the April-June quarter.

While indications of those higher savings were visible in the increased demand for currency, high deposit growth and inflows into insurance products, the extent of jump in household savings is larger than most would have expected. Preliminary estimates, published in the Reserve Bank of India’s monthly bulletin, suggest that household financial savings rose to 21.4% of the GDP in the first quarter of FY21. That compares with 10% in the fourth quarter of FY20.

The RBI also revised its estimate of household financial savings for FY20 to 8.3% of the GDP from the earlier estimated 7.7% of the GDP.

Two factors contributed to the increase in financial savings.

“First, the households would have been forced to save more, being unable to consume up to their normal levels. The household consumption basket would have comprised a limited number of items relative to the pre-Covid period,” the RBI bulletin said. “Second, they may have raised their precautionary savings due to uncertainty about their future incomes, flowing from cautious responses to reports of actual and potential job losses.”

The RBI cautioned that the estimates are preliminary and may be revised down the line.

Where Did The Savings Flow?

A study of the fine print suggested an increase in cash, mutual funds and insurance holdings by households.

  • The household savings in mutual funds has increased to 1.7% of the GDP in Q1 FY21 from (-) 0.9% in Q4 FY20 and 0.2% in Q1 FY20.
  • Household savings in insurance products is estimated to have increased to 3.3% from 0.7% and 2.3%, respectively, over the same period.
  • Currency holding by households increased to 5.4% from 3.0% in Q4 FY20 and 1.3% in Q1 FY20.

“The increased flows to mutual funds 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,” the RBI said. “The rise in subscription to insurance products reflects the pandemic-led increased awareness of life insurance amongst the households. In these times of emergency, life insurance has become a necessity and not just a matter of benefit.”

On the other hand, the increase in currency holding on the part of households reflects flight to safety or ‘dash to cash’ behaviour under extreme uncertainty brought upon by the pandemic, the analysis suggested.

Outlook & Implications

The jump in household financial savings is not unique to India and can persist for some time till the pandemic recedes and consumption levels get normalised, the RBI said. However, savings are expected to taper off as the Covid curve flattens, allowing households to spend and economic activities to revive in the coming quarters.

“The true assessment of the financial savings glut will only be known some years down the line,” the analysis said. While it lasts, a much larger pool of financial surplus can be tapped for intermediation in an innovative way, it added.