Households saved less in Q2, spent on discretionary items: RBI bulletin

Financial savings of households, which had risen disproportionately in the April-June quarter of 2020 (Q1) as the economic activity came to a halt, fell back to their usual levels in Q2, official data showed on Friday.
 
In the quarter when the country was under a lockdown, net financial savings rose to 21 per cent of gross domestic product (GDP), according to the data released in the RBI’s monthly bulletin. In Q2, the net flow was 10.4 per cent of GDP.
 
Apart from a fall in financial assets, the drop was caused by a rise in liabilities (net savings are assets minus liabilities). As for the debt stock, household debt is now 37.1 per cent of GDP.

 

“This reversion is mainly driven by the increase in household borrowings from banks and NBFCs accompanied by a moderation in household financial assets in the form of mutual funds and currency,” an article in the Bulletin noted. “Some constituents of consumption, particularly discretionary, picked up after a quarter-long dormancy, which, in turn, led to the moderation in financial savings of households.”
 
But there is a possibility that it’s the pent-up demand getting reflected in the rising consumption and falling savings in Q2, it said.


 
The flip-flop in flows of financial savings was not very different in advanced economies, where net financial savings rose sharply in Q1 and declined in Q2. But while the drop in Q2 was commensurate to the rise in Q1 for India, savings remained at a higher level in most advanced economies.

 
Addition to household savings in the form of currency had shot up to 5.3 per cent of GDP in Q1FY21. It moderated to 0.3 per cent of GDP in Q2, meaning that households did not stash cash as they did during the lockdown, and they either spent the money or deposited it in banks.
 
“This mainly reflected the lower uncertainty with the unlocking of the economy and resumption of economic activity,” noted the article.
 
Savings in the form of bank deposits rose as households continued keeping more money in banks considering them as safe havens. Households poured in money to the tune of 7.4 per cent of GDP in commercial bank deposits in Q2. At the same time, non-bank deposits, flows to mutual funds and equities moderated in the September quarter.

 
Interestingly, flows to insurance funds, which usually hover between 1 and 2 per cent of GDP, remained robust above 3 per cent of GDP each in Q1 and Q2 on the back of pandemic-led awareness, the report noted.
 
As the lockdown was gradually lifted from June, loans picked up “quicker than expected”, pushing up household liabilities. From 31.4 per cent of GDP in the Q1 of 2018-19, household debt stock is now at 37.1 per cent of GDP.


 
Bank credit is growing, albeit at a slower pace, monthly RBI data has been showing consistently. However, it also shows that retail credit is growing faster than overall credit, reflecting that households are at the forefront of credit revival, more than businesses.

 
“The significant pick-up in household loans, juxtaposed with a tepid growth in aggregate bank credit, was reflected in the increase in household share in total credit by 1.3 percentage points to 51.5 per cent in Q2,” said the article.
 
Preliminary data shows a further moderation in household financial savings in Q3, as bank advances picked up faster than deposits. Fast vaccination may further boost consumption and the pre-pandemic spending and saving pattern may get restored, the RBI said.