The year-long pandemic left households with more debt, which rose sharply to 37.1% of GDP in the second quarter of FY21, while their savings rate plunged to 10.4%, according to the reports. latest data from the Reserve Bank.
Household savings have plunged as the pandemic has resulted in the loss of jobs by tens of millions of people and almost all forced to undergo significant pay cuts, forcing them to borrow more or dip into their savings to make ends meet. facing their expenses.
Thus, the share of households in the overall credit market jumped to 51.5% in the second quarter, up 130 basis points year-on-year.
Counter-seasonally, the pandemic-induced peak in the household financial savings rate in the first quarter of FY21, when it hit an unprecedented level of 21% of GDP, plunged to 10. 4% in the second quarter, the March issue of the RBI newsletter released over the weekend showed.
However, that is still higher than the 9.8% recorded in the second quarter of FY20, according to the report.
RBI economists said that normally when the economy stagnates or contracts, household savings increase and when the economy recovers, it falls as people become more confident in their spending. In our case, savings jumped to an all-time high of 21% in the first quarter, when GDP contracted from a record 23.9%, and when the contraction moderated to 7.5. % in the second quarter, household savings plunged to 10.4%.
“The inverse relationship between the household saving rate and GDP growth may seem counterintuitive, but studies have shown that households tend to save more during the economic downturn and greater uncertainty about income,” supports the report.
A similar trend was also observed during the global financial crisis of 2008-09, when household savings jumped 170 basis points as a percentage of GDP in FY09 and slowed down thereafter. with the recovery of the economy.
But, the report warned that the household savings rate would have fallen further in the third quarter, citing preliminary figures due to near-normal consumption and economic activity.
“The ratio of household debt to GDP, which has steadily increased since the first quarter of FY19, rose sharply to 37.1 in the second quarter of FY21 from 35.4 in the first trimester. There has also been a significant increase in the share of household loans in overall credit. market, which rose 1.3bp to 51.5% in the second quarter, ”according to the RBI bulletin.
While household deposits and borrowing also increased, their holdings of currencies and savings in mutual funds moderated, according to the report, which attributed the increase in consumption, especially its components. discretionary, to a resumption of economic activity following the easing of blockages. .
The downturn in household financial savings is corroborated by the smaller current account surplus.
According to the report, this indicates that the decline in the household savings rate to 10.4% is closer to pre-pandemic levels, mainly due to the increase in household borrowing from banks and NBFCs, accompanied a moderation in household financial assets in the form of mutual funds and currencies in the first quarter, because due to the foreclosure households were unable to spend.
This is evident from the smaller contraction in private final consumption expenditure as well as the smaller current account surplus in the second quarter.
With overall consumption growth, the pace of private final consumption contraction slowed to 11.3 percent in the second quarter, from a sharp contraction of 26.3 percent in the first quarter.
But the report admitted that the fall in savings in the second quarter was counter-seasonal and reflected the impact of a sequentially high base and a pick-up in discretionary household spending after lockdowns eased with a surge in demand. repressed.
In contrast, household savings have returned closer to pre-pandemic levels in the country, in part due to the long holiday season and pent-up demand.
The report also noted that although overall savings increased during the pandemic, it could still mask the uneven impact in terms of household savings and consumption of non-essential items, as several households in the unorganized sector have suffered job losses, income and borrowing opportunities. .
Going forward, with optimism about mass immunization, household savings are expected to decline further to pre-pandemic levels, according to the report.
In addition, there was a notable decline in household savings in the form of foreign currency to 0.4 percent of GDP in the second quarter from 5.3 percent in the first quarter. Likewise, household investment in mutual funds declined to 0.3 percent from 1.7 percent, while savings in insurance moderated to 3 percent from 3.2 percent in the first trimester.
On the liabilities side, the share of household commitments to banks and HFCs fell, while that of NBFCs increased compared to Q1.
On the other hand, aggregate bank deposits have steadily increased and have affected ??142.6 lakh crore in the second quarter, an increase of ??4 lakh crore since Q1.
On the other hand, the bank advances to ??102.7 lakh crore in the second quarter increased only 20 basis points on a quarterly basis, compared to a contraction of 1.2% in the first quarter, reflecting some recovery in economic activity.