Higher borrowing and rising consumption have led to a fall in the household financial savings in the second quarter (Q2) of 2020-21. The savings rate fell to 10.4 percent of GDP from a relatively high 21.0 percent in the preceding quarter, an RBI study revealed.

Share Market Live

NSE

While the savings rate in the quarter ending September 2020 may have fallen, the value is still higher than the 9.8 percent witnessed in the preceding period year-on-year (YoY).

The RBI, in its State of the Economy report for the March bulletin, said: “The COVID-19-induced spike in the household financial savings rate in Q1:2020-21 waned substantially in Q2 in a counter-seasonal manner.”

The report acknowledges that the fall in the quarter ending September 2020 could be driven by an increase in household borrowings from banks and non-banking financial companies (NBFCs), with household incomes taking a major hit due to the pandemic.

The RBI report explained that moderation in household financial assets in the form of mutual funds and currency could be another major contributing factor.

Also Read: Indian households switch from ‘essentials only’ to ‘discretionary’ spending, RBI study shows

The study also stated that the household debt-to-GDP ratio rose from 35.4 percent in the quarter ending June 2020 to 37.1 percent in September-end.

Explaining the inverse relationship between household financial savings rate and GDP growth, the study said, “While real GDP contraction of 24.4 percent in Q1:2020-21 was accompanied by household financial savings rate of 21.0 per cent, a moderation in GDP contraction to 7.3 percent in Q2 coincided with the reduction in the household financial savings rate to 10.4 percent. The inverse relation between household financial savings rate and GDP growth may sound counterintuitive, but studies have shown that households tend to save more during the economic slowdown and greater income uncertainty.”

It further added that a similar trend was observed during the global financial crisis when household financial savings rate increased by 17 basis points as per cent to GDP during 2008-09, which moderated subsequently as the economy picked up.

With regard to the liabilities, the report noted that the share of household liabilities from the banking and HFCs sectors have reduced, while that of NBFCs has increased from the quarter ending June 2020 onwards.

“The shift favouring NBFCs during an economic crisis as well as the pessimism on the future stream of income flow could be attributed to the increased risk aversion and tighter eligibility criteria for bank loans vis-à-vis NBFCs,” the report said.

Also Read: RBI warns against 'bond vigilantes', says they're hampering nascent recovery