ECOSCOPE: Household financial savings at 5-year high

COPE

Household financial savings at 5-year high

Leading indicators show further pick-up in FY17



19 September 2016

The Economy Observer

Reserve Bank of India (RBI) data indicate that household gross financial savings (GFS) increased from 10.1% of GDP in

FY15 to 10.9% in FY16 – the first significant pick-up in six years. However, with financial liabilities also picking up, net

financial savings (NFS) – key element for the economy – moved only marginally from 7.6% to 7.8%.



Households’ exposure to shares & debentures in FY16 was the highest ever in absolute terms. Holding of currency as a

percentage of GFS was the highest since 1990. Notwithstanding lower interest rates on small savings schemes,

households increased their claims on government schemes.



Leading indicators show that the build-up of growth in bank deposits, currency and equities has been better in April-

August 2016, indicating further pick-up in household GFS in FY17. However, with faster growth in borrowings, the

improvement in NFS could remain subdued in FY17 also.



Household GFS increased for the first time in six years…:

Recently released RBI

data indicate that Indian households increased their gross financial savings (GFS)

from 10.1% of GDP in FY15 to 10.9% in FY16

(Exhibit 1).

While this is still much

lower than the average GFS rate of 14.4% in the decade to FY11, FY16 marked

the highest increase in GFS rate in six years

(Exhibit 2 on the next page).

…driven by higher exposure to capital markets, more currency holdings and

government deposits:

Households increased their exposure to capital markets,

as they bought shares & debentures worth INR918b in FY16 – the highest

absolute amount in a single year on record (since 1950s). Further, currency was

the most preferred method of savings, currency holdings increased to 13.5% of

GFS in FY16, the highest since 1990. Notwithstanding lower interest rates,

household savings in government schemes also increased considerably

(Exhibit

3).

On the other hand, unlike in FY15, savings in long-term safe assets

(insurance, provident & pension funds, IP&PFs) grew slowly. Finally, deposit

growth was also subdued despite low base (declined 6.5% in FY15).

The increase in NFS, however, was marginal:

While GFS increased significantly,

household financial liabilities also picked up from 2.6% of GDP in FY15 to 3.1% in

FY16. Consequently, household net financial savings (NFS), which is what

matters for the economy, inched up only marginally from 7.6% of GDP in FY15 to

7.8% in FY16 – broadly in line with our estimates. Though this is the highest NFS

rate in five years, it was much lower than the average rate of ~11% of GDP in the

decade to FY11

(Exhibit 4).

Leading indicators point to further pick-up in GFS in FY17:

A look at several

leading indicators to gauge household financial savings for FY17 points to

further pick-up in gross financial savings. The build-up growth in bank deposits

in the first five months of FY17 is 3.6%, as against 2.9% in the corresponding

period last year. Similarly, currency till August 2016 was up 4.7%, as against

2.7% in April-August 2015 and exposure to equity also seems to be stronger

(Exhibit 5).

While GFS is likely to increase further in FY17 – a definite positive

development – higher borrowings may keep improvement in NFS limited.

Nikhil Gupta

(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405

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