Households Rebuild Financial Savings: Insights from address of RBI Deputy Governor Patra

Households Rebuild Financial Savings: Insights from address of RBI Deputy Governor Patra

Sub: Eco

Sec: Indian Economy

• Rising Financial Savings Among Households:
  • Households have started to rebuild their financial savings, driven by rising incomes.
  • Financial savings had dropped significantly from their levels in 2020-21 due to shifts towards physical assets like housing and the unwinding of savings accumulated during the pandemic.
• Historical and Recent Trends in Financial Savings:
  • During 2011-17, household financial savings were around 10.6% of GDP, increasing to 11.5% of GDP during 2017-23 (excluding the pandemic year).
  • Prior to the global financial crisis, household financial savings were as high as 15% of GDP.
  • This level may be approached again as households continue to rebuild their financial assets.
• Increase in Physical Savings Post-Pandemic:
  • Post-pandemic, household physical savings have risen to over 12% of GDP.
  • However, this is still below the 16% of GDP observed in 2010-11.
• Households as Key Lenders to the Economy:
  • Households are expected to remain the top net lenders to the economy in the coming decades, playing a critical role in supporting the financial system.
• Corporate Sector Borrowing Dynamics:
  • The private corporate sector has reduced its net borrowing due to increased internal accruals and subdued capacity creation.
  • However, net borrowing needs are expected to rise with the revival of the capital expenditure (capex) cycle, with households and external resources likely to meet these financing requirements.
• Public Sector Dissaving:
  • Net dissaving of the public sector has been moderating but unevenly.
  • The public sector is expected to remain a net borrower in the economy, given the crucial role of fiscal policy in shaping India’s future.
• Role of External Financing:
  • Domestic savings have largely financed India’s investment needs, with external financing playing a supplemental role, reflected in modest current account deficits.
  • As the productive capacity of the economy increases, the volume and composition of external financing may undergo significant changes.
  • External debt sustainability will remain a key policy priority, especially as the nation continues to borrow from the rest of the world to finance its investment needs.