After a brief slip, household savings behaviour is returning to normalcy, according to the Reserve Bank. This is a welcome development and should help regain the trendline growth rate. In 2022–23, household savings hit a record low at 5.2 percent of the gross national disposable income, while debt rose to an all-time high at 5.7 percent. It all began with the pandemic, when households saved higher proportions in financial assets like mutual funds and equities, which has now partly shifted to physical assets like real estate, even if it’s translating to higher borrowings. The proportion of physical assets peaked at 12.9 percent of GDP in 2022–23, while the share of net financial savings in total household savings fell from an average of 39.8 percent during 2013–2022 to 28.5 percent in 2022–23. Within financial assets, what is concerning is the diversification of financial products from traditional bank deposits to riskier assets like equities.
None other than RBI Governor Shaktikanta Das raised red flags in June, indicating that derivatives market volumes might have exceeded India’s nominal GDP, and took up the matter with markets regulator Sebi for appropriate action. A recent SEBI study also found that of the 92.5 lakh retail traders in the derivatives market, only 14.22 lakh made a net profit. In other words, about 85 out of every 100 traders incurred losses. An alarmed Sebi wasted no time to raise the minimum contract size for futures and options (F&O) to Rs 20 lakh and limit weekly options contracts. It may take a while for things to subside. But on Thursday, the RBI clarified that not all household savings were being funnelled into the F&O segment, and that equity growth does not necessarily correlate with falling household savings.
That said, the central bank maintained that alternative investments remain attractive to retail customers, due to which banks were facing funding challenges with deposits trailing loan growth. The widening gap between deposits and credit growth could lead to asset liability or liquidity management challenges for banks, who may be forced to take greater recourse to short-term, non-retail deposits and other instruments to meet the credit demand. So Das urged banks to focus on mobilising household savings through innovative products and by leveraging their branch networks. Households account for over 61 percent of the gross domestic savings. Hence, it’s crucial to sustain the savings momentum.
