A spike in net financial assets of households is likely in the first quarter of 2020-21 on account of a sharp drop in lockdown induced consumption.
The household savings is expected to spike in Q1’20-21 due to forced slowdown in COVID- related consumption. This is going to come in handy to finance revival of the economy, an RBI research paper said as it is the most sustainable and self-reliant source of financing for the Indian economy.
A spike in net financial assets of households is likely in the first quarter of 2020-21 on account of a sharp drop in lockdown induced consumption. Several studies show that households tend to save more during a slowdown and income uncertainty, said the paper written by Anupam Prakash, Anand Prakash Ekka, Kunal Priyadarshi, Chaitali Bhowmick and Ishu Thakur of RBI’s department of economic and policy research.
Economists have forecast worse ever contraction of the Indian economy during FY’21 following the nation-wide lock-down to combat the COVID-19 pandemic. The paper also warns that lags in the pickup of economic activity may cause the financial surplus of households to taper off in subsequent quarters. With construction activity at a standstill, there is a possibility of a shift by households from physical assets such as residential property to financial assets such as deposits, cash, and mutual funds and are more useful in funding businesses and the economy’s growth. At Rs 15.6 lakh crore as of March 2020, India’s net financial savings rose to 7.7 per cent in FY’20 from 7.2 per cent in FY’19.
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The household sector is the most sustainable and self-reliant source of financing for the Indian economy, the report notes. Its role is likely to become critical in the context of the policy effort gathering critical mass to lift the Indian economy from the vice-like grip of a slowdown and, more recently the life-threatening COVID-19 pandemic, it said.
Financial assets or financial savings of the Indian households are held in currency, bank deposits, debt securities, mutual funds, insurance, pension funds and small savings. Currency and deposits with banks accounted for bulk of total financial assets accounting for 66 per cent, followed by insurance funds and mutual funds which together account for 30.2 per cent. These in-turn are good funding sources for businesses.
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