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Inflation eating into household
financial savings
Event
ƒ RBI released household gross financial savings data for FY11.
Impact
ƒ The gross financial savings of households moderated to 13.3% of GDP in
FY11 from the recent peak of 15.1% of GDP in FY10. Household net financial
savings (household financial assets less liabilities) also slowed to 9.7% of
GDP in FY11 (lowest since FY05) from 12.1% of GDP in FY10.
ƒ Household savings in deposit accounting for the bulk of households financial
savings slowed to 6.3% of GDP in FY11 from 7.1% of GDP in FY10. The
persistence of high inflation and lower real interest rates were the main
reasons for this moderation. Headline inflation (WPI) accelerated to 9.6% YoY
in FY11, the highest in 16 years.
ƒ High inflationary pressures also forced households to hold more currency.
Indeed, the currency holdings in financial savings of the household sector
increased to 1.8% of GDP in FY11 from 1.5% of GDP in FY10.
ƒ The volatility in equity markets resulted in a decline in household savings in
shares and debentures to -0.1% of GDP in FY11, similar to the levels seen in
FY09 (credit crisis), mainly driven by redemption of mutual fund units. This
compares with +0.7% of GDP in FY10.
ƒ Household financial liabilities, on the other hand, increased in FY11, reflecting
higher borrowings from commercial banks.
Outlook
ƒ Household aggregate savings would have remained largely stable in
FY11: While the data on total gross household savings (physical and
financial) is still not released, we believe there would have been some
reallocation of savings from financial assets to physical assets like gold and
property in FY11. The aggregate savings in the economy would have
remained largely stable at 33.8% of GDP in FY11, based on our estimates,
compared to 33.7% of GDP in FY10.
ƒ Reforms required to increase the share of financial savings: Historically,
Indian households have preferred physical savings (like land, houses, gold
and livestock) over financial savings. Indeed, the share of physical savings as
% of total household savings stood at nearly 50% in FY10. In rural areas, the
share would be higher, in our view. The low share of financial savings can be
largely attributed to low penetration of financial services and the inadequacy
of the social security scheme in India. Further deepening of financial sector
reforms and introduction of a long-term savings scheme would be key to
encouraging a shift towards financial assets. Similarly, there are instruments
available to monetise the savings in physical assets, such as gold, to channel
them productively in the real economy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Inflation eating into household
financial savings
Event
ƒ RBI released household gross financial savings data for FY11.
Impact
ƒ The gross financial savings of households moderated to 13.3% of GDP in
FY11 from the recent peak of 15.1% of GDP in FY10. Household net financial
savings (household financial assets less liabilities) also slowed to 9.7% of
GDP in FY11 (lowest since FY05) from 12.1% of GDP in FY10.
ƒ Household savings in deposit accounting for the bulk of households financial
savings slowed to 6.3% of GDP in FY11 from 7.1% of GDP in FY10. The
persistence of high inflation and lower real interest rates were the main
reasons for this moderation. Headline inflation (WPI) accelerated to 9.6% YoY
in FY11, the highest in 16 years.
ƒ High inflationary pressures also forced households to hold more currency.
Indeed, the currency holdings in financial savings of the household sector
increased to 1.8% of GDP in FY11 from 1.5% of GDP in FY10.
ƒ The volatility in equity markets resulted in a decline in household savings in
shares and debentures to -0.1% of GDP in FY11, similar to the levels seen in
FY09 (credit crisis), mainly driven by redemption of mutual fund units. This
compares with +0.7% of GDP in FY10.
ƒ Household financial liabilities, on the other hand, increased in FY11, reflecting
higher borrowings from commercial banks.
Outlook
ƒ Household aggregate savings would have remained largely stable in
FY11: While the data on total gross household savings (physical and
financial) is still not released, we believe there would have been some
reallocation of savings from financial assets to physical assets like gold and
property in FY11. The aggregate savings in the economy would have
remained largely stable at 33.8% of GDP in FY11, based on our estimates,
compared to 33.7% of GDP in FY10.
ƒ Reforms required to increase the share of financial savings: Historically,
Indian households have preferred physical savings (like land, houses, gold
and livestock) over financial savings. Indeed, the share of physical savings as
% of total household savings stood at nearly 50% in FY10. In rural areas, the
share would be higher, in our view. The low share of financial savings can be
largely attributed to low penetration of financial services and the inadequacy
of the social security scheme in India. Further deepening of financial sector
reforms and introduction of a long-term savings scheme would be key to
encouraging a shift towards financial assets. Similarly, there are instruments
available to monetise the savings in physical assets, such as gold, to channel
them productively in the real economy.
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