Prof Mithilesh Kumar Sinha
Finance Officer, Nagaland University
Household savings is crucial to gauge macroeconomic and systemic risks Households hold its financial assets mainly in the form of currency, deposits, debt securities, equities, mutual fund units, insurance and pension funds, and small savings. Liabilities are mostly in the form of loans and borrowings from banks, housing finance companies and non-banking financial corporations, the study said.
According to the report, financial assets of the Indian households are predominantly in the form of bank deposits, followed by life insurance — a pattern that got disrupted after note ban. It was back on track the next quarter as and when new currency notes were introduced in the system.
According to the report, financial assets of the Indian households are predominantly in the form of bank deposits, followed by life insurance - a pattern that got disrupted after note ban According to the report, financial assets of the Indian households are predominantly in the form of bank deposits, followed by life insurance — a pattern that got disrupted after note ban. It was back on track the next quarter as and when new currency notes were introduced in the system.
Demonetisation has led to a shift in the composition of households’ financial assets. By September 2017, currency holdings were down to 8.7% of GDP, compared to 10.6% in the pre-demonetisation quarter. The other clear trend is that households’ holdings of mutual funds have gone up, from 10.6% before demonetisation to 12.5% in September 2017. Indeed, the fall in currency/GDP is mirrored in the rise in mutual funds/GDP holdings of households. People have put their currency holdings to work in the financial markets, pushing them up.
According to the estimates of household financial assets and liabilities RBI, gross financial assets (GFAs) of households fell from 95.2 per cent of gross domestic product (GDP) at the end of Q2 of 2016-17 to 89.2 per cent at the end of Q3 of 2016-17- the period when the note ban was announced. Much of this decline was due to the collapse of the currency with households. As the process of remonetisation gathered steam, households’ GFAs rose to 95.4 per cent of GDP at the end of Q1 of 2017-18 and much of the households’ financial assets (HFAs) are parked as bank deposits. Bank deposits in commercial banks account for almost half of HFAs as seen in the Table.
As seen in the Table, household MF assets have risen from 9 per cent of GDP in Q1 of 2015-16 to 12.5 per cent in Q2 of 2017-18. The currency with households has also recovered from the note ban shock, though not completely. It declined from 10.16 per cent of GDP in Q2 of 2016-17to 4.8 per cent in Q3 of 2016-17, recovering thereafter to 8.7 per cent in Q2 of 2017-18. On the other hand, as seen in the Table, household financial liabilities have risen to 25.8 per cent of GDP in Q1 of 2015-16 to 29.1 per cent in Q2 of 2017-18.
Compared to the rise in the outstanding amounts, the quarterly investment by households in financial assets is very volatile. The RBI report says, “Indian households are generally net savers and suppliers of financial resources for the rest of the economy. However, net financial assets of the households turned negative…in the third quarter of 2016-17, reflecting the transitory effects of demonetisation.”
