Quick savings recovery after demonetisation jolt: Reserve Bank of India

A woman walks past the Reserve Bank of India (RBI) head office in Mumbai | Photo: Reuters
The Reserve Bank of India’s (RBI’s) first quarterly publication on households’ financial assets pattern shows that Indian households quickly overcame the jitters from demonetisation.


So far the study was published annually, but will now be available every quarter. The reason being an annual study often fails to capture the sharp volatility witnessed in investments and savings pattern every quarter.


Household savings is crucial to gauge macroeconomic and systemic risks and is taken into consideration while preparing the bi-annual financial stability report.


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.


“Indian households are net savers and suppliers of financial resources for the rest of the economy,” the study said. The net financial assets of the households turned negative (-7.3 per cent of gross domestic product, or GDP, in the third quarter of 2016-17) after cash wash, it added.


However, with subsequent introduction of new currency notes, households’ net financial assets turned around. In the fourth quarter, they amounted to 14.8 per cent of the quarterly GDP. In 2017-18, net financial assets are estimated at 8.3 per cent of GDP in the second quarter, up from 5.8 per cent of GDP in the first quarter.


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 study, borrowings from banks turned negative after note ban “as demonetised currency was used to pay back loans.”


The study said deposits with banks and non-banks increased in the second quarter of 2016-17 to 8.6 per cent of GDP from 8.1 per cent in the previous quarter, reflecting the impact of salary and pension revision due to the implementation of the Seventh Pay Commission. The mobilisation of deposits under the income declaration scheme also had an impact.


There was a major shift in the asset classes of households.


Currency with households contracted sharply in the third quarter of 2016-17. But the contraction “was not matched by a proportionate increase in deposits due to redemption of the foreign currency non-resident (FCNR-B) deposits and repayment of loans with specified bank notes”.


In the fourth quarter of 2016-17, introduction of new currency notes led to a rise in currency holdings — up to 11.1 per cent of quarterly GDP from (-) 21.5 per cent in the quarter that witnessed demonetisation.


Aggregate deposits went down to 3.6 per cent in the fourth quarter of 2016-17 from 5.4 per cent in the third quarter.


In the first two quarters of 2017-18, currency holdings moved towards normalcy. While currency with the public rose to 1 per cent of GDP in the second quarter of 2017-18, aggregate deposits were 5.9 per cent of GDP. Pension funds and mutual funds picked up in 2017-18 and their shares in GDP were 0.6 per cent and 1.4 per cent, respectively, in the second quarter, the study said.


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