Households tend to save more during a slowdown and income uncertainty. But, currency and deposits with banks rose to 66 per cent of the total financial assets of households as on March 2020, its highest share since June 2015, thanks to coronavirus-related disruptions.
According to the Reserve Bank of India's quarterly estimates of households' financial assets and liabilities in its latest monthly bulletin, this contribution rose steeply from 64.4 per cent as on December 2019. Traditionally, these group of assets accounts for a bulk of household financial assets. "COVID-19 related uncertainties have resulted in an outflow from mutual funds and a flight to currency holdings," the bulletin added. The other significant instruments include life insurance funds and mutual funds.
This article updates the March 2018 pilot exercise by the RBI and consolidates information on households' financial assets and liabilities for 12 quarters extending to March 2020.
A further break-up revealed that outstanding currency share in the household assets too followed the suit as the share reached a high of 13.4 per cent in the last 12-quarters.
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Deposits with banks, which had declined persistently from the third quarter of 2016/17, recorded an uptick from Q4FY19 as banks competed aggressively to raise resources. Its current contribution stood at 52.6 per cent of household financial assets. A recent shift was visible in the favour of financial assets in mutual funds and insurance, which was at 7 per cent and 23.2 per cent, respectively as on March 2020.
Normally, currency patterns are associated with festivals, rabi procurement and kharif sowing, and tourism-related demand. "Moderate seasonality is also seen in insurance products - peaks in the fourth quarter to get income deductions," the RBI noted.
Moreover, at 66 per cent, India is way ahead of some of the European nations, including the USA and Australia. Though this data is not strictly comparable, a cursory look at the share of currency and deposits in household financial assets for some 15 OECD (the Organisation for Economic Co-operation and Development)
countries, whose data for 2019 was available, shows Greece tops the charts with a 58.5 per cent contribution, with a low share of 20.1 per cent and 12 per cent each for Australia and the USA, respectively.
Further, in fiscal 2020, net financial assets of Indian households gathered pace touching 7.7 per cent of GDP it last reached in 2017/18. It moderated to 7.2 per cent in 2018-19, reflecting higher consumption expenditure by households. "This improvement has occurred due to moderation in household bank borrowings being sharper than that in bank deposits, except in the fourth quarter of 2019-20 due to COVID-19 related economic disruptions," the RBI said.
Going forward, a spike in net financial assets of households is likely in the first quarter of 2020-21 on account of a sharp drop in the lockdown-induced consumption. "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 to financial assets," the central bank added.
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