Households have started building back financial savings: RBI Deputy Governor Patra

Households' physical savings have also risen in the post-pandemic years to over 12 per cent of GDP and could rise further – they had reached 16 per cent of GDP in 2010-11.

Households have started building back financial savings: RBI Dy Guv

Going ahead, the corporate sector's net borrowing requirement is likely to rise on the back of a revival in the capex cycle.

With rise in income, households have started building back their financial savings, and are going to be the ‘top net lenders’ to the economy, Reserve Bank of India (RBI) Deputy Governor Michael Patra said on Tuesday.

In the circular flow of income and expenditure that describes the working of an economy, transactions in goods, services, compensations and taxes are matched by flows of saving and investment, which represent inter-sectoral transfers of lendable resources. In India, the household sector typically generates surplus savings relative to its investment which it lends to other sectors.

Recently, net financial saving of households almost halved from its level in 2020-21 due to behavioural changes in the form of unwinding of prudential savings accumulated during the pandemic as well as shifts from financial assets to physical assets such as housing, Patra said.

“Going forward, boosted by rising incomes, households will likely build back their financial assets – 15 per cent of GDP was observed during the early 2000s up to the global financial crisis. This process has already begun – households’ financial assets have increased from 10.6 per cent of GDP during 2011-17 to 11.5 per cent during 2017-23 (excluding the pandemic year),” Patra said during a speech at the CII’s Financing 3.0 summit.

Households’ physical savings have also risen in the post-pandemic years to over 12 per cent of GDP and could rise further – they had reached 16 per cent of GDP in 2010-11.

“Accordingly, households will remain the top net lenders to the rest of the economy in the coming decades,” he said.

The Deputy Governor noted that the private corporate sector has drastically reduced its net borrowings from the rest of the economy, reflecting a combination of rising internal accruals and subdued capacity creation.

Story continues below this ad

Going ahead, the corporate sector’s net borrowing requirement is likely to rise on the back of a revival in the capex cycle.

“These financing requirements will largely be met by households and external resources,” he said.

According to Patra, net dissaving of the public sector has been moderating albeit unevenly; this sector will remain a net borrower in the economy in view of the critical role envisaged for fiscal policy in shaping India’s future.

He said if the nation as a whole has a deficit, it borrows from the rest of the world and the inflow of foreign savings helps finance its investment needs.

Story continues below this ad

However in the case of India, domestic savings have largely financed the overall investment requirements of growth, with external financing playing a supplemental role as reflected in largely modest current account deficits.

As the productive capacity of the economy rises and its ability to absorb foreign resources expands, the volume of external financing and its composition may undergo fundamental shifts, but in the light of past experiences, external debt sustainability will remain a policy priority, he stated.