Rupee Image Credit: IANS

Mumbai: Indians, traditionally known to save money, have of late shown a behavioural change in terms of managing their money as their financial surpluses have shrunk in the last couple of years.

A recent Reserve Bank of India (RBI) report said that although currency and deposits constitute more than half of the total assets held by households, their share in total assets have been declining over time and are being replaced by equities and debt securities.

This is in concurrence with another report, released in March, by Kotak Institutional Equities - which also showed a negative trend on household savings in the country. In this report, savings rate of Indian households in 2018 stood at 17.2 per cent, a dip considering that the same rate in 2011-12 was 23.6 per cent.

"The financial surplus of households have shrunk in subsequent years. In 2017-18, both household assets and liabilities expanded but the growth in the latter outpaced the former resulting in further moderation in surplus," as per the the report.

Around 17 %

is the savings rate of Indian households in 2018, a significant drop from 6 years ago.

Why the change?

Surveyors of the March report wondered if "the decline in overall savings rate is due to some combination of continued high consumption by households, low job creation in general and increase in financial liabilities of households to support short-term consumption." So, according to the report, the reason for this decline could be all or any combination of these three: high consumption, low job creation or an increase in liabilities specifically for short-term daily consumption.

However, other reports referenced in regional media suggest that this shift could also be an increased appetite for risk - something new to the typical Indian investor's psyche. For instance, in 2011-12 - with a high savings rate of around 23.6 per cent - most of the savings went into low-return deposits, investment-linked life insurance, real estate and gold. All of these are zero to low-risk savings instruments. This has changed.

Increasing risk appetite?

Among household assets, the RBI report states that the share of insurance and pension funds have gradually increased, indicative of the growing risk appetite and portfolio diversification. The major liability in household balance sheets are loans and borrowings, primarily from other depository corporations (ODC) and other financial corporations (OFCs), the report said.

Taking a view of RBI data, the share of equity is up, at 8 per cent of household financial assets in 2018, a hike from a mere 3 per cent in 2016. This data also shows that the share of bank deposits is falling - a favoured low-risk fixed interest tool - as is that of gold and real estate. 

What does this mean for you, as an Indian investor?

Household sector funds make a huge impact on the Indian economy. Households, i.e. regular folks, play multi-dimensional roles as consumer, investor and entrepreneur. More than half of GDP is generated in the form of household consumption and around one-tenth in terms of household investment. Households also act as entrepreneurs by investing in buildings, machinery, and equipment related to their business as self-employed workers or sole proprietors

This sector, which is the major supplier of funds flowing through the Indian economy, is now showing signs of a major change - from physical investment instruments (such as gold or real estate) to financial instruments. The RBI report also noted that from savings deposits, a favoured low-risk tool for many investing Indians, the interest has moved to investments in mutual funds, insurance and pension funds is also observed.

The report also highlights that the increased investments of the household sector in equity and debt securities, coupled with a decrease in foreign investments, has shown the role of the rest of the world sector (investment from outside India) seems to have declined over time. However, the foreign investments were enough to comfortably meet India’s external financing requirements.

According to official data, household financial assets and their surplus showed an uptick during 2015-16 on account of higher currency and deposits supported by high income growth as India's gross domestic product (GDP) growth touched 8 per cent for the first time during the current decade.

Who is helping households channel this money?

The data suggested that households are connected the most with financial corporations which act as intermediaries to channel their surpluses to deficit sectors.

Demonetisation effect on money

Demonetisation did have an effect on the change in investments - the one from deposits to mutual funds and insurance investments. The report said "demonetisation had a significant but transitory impact on the instrument used for acquisition of financial liabilities during 2016-17, and a quick reversal in the following year."

"Increased number of insurance policies and mutual funds units were issued during 2016-17," the report summarised on the effect of demonetisation. 

Government share, gaps and deficit

Talking of the governments, both in the Centre and states, the report said that on the governments' assets side, equity has the largest share, which is reflective of participation of the central government in corporations, both financial and non-financial. This is followed by deposits held with ODCs, more pronounced in the case of state governments which have accumulated large cash balances, reflecting poor cash management.

The financial resource gap of the general government sector remained stable during the period 2012-13 to 2016-17, widening somewhat during 2017-18. "This gap was primarily financed by the OFCs and ODCs, " it said.

Debt securities make up almost three-fourths of total financial liabilities. These debt securities act as a safe haven for investors and are statutorily mandated for scheduled commercial banks (SCBs) under the liquidity coverage ratio (LCR) in addition to the minimum statutory liquidity ratio (SLR) requirement.

In its conclusion, the report noted that in the recent years, the general government has emerged as the major deficit sector in the economy exhausting a major share of the surplus of households.