Real Estate Takes Center Stage in Indian Household Savings

In a recent report by global brokerage firm BofA Securities, it was revealed that Indian households continue to play a pivotal role in contributing to the country's gross domestic savings. The report indicates that households contribute a significant 70% to the total savings, with financial assets accounting for 56% and physical assets for 44%.

Notably, there has been a notable shift in the composition of household savings. While financial savings are still substantial, there is a rising trend in physical savings. As of FY22, households have allocated an average of 77% of their total assets to real estate, 7% to other durable goods, and 11% to gold. This marks a considerable increase from the FY12 figures, where real estate holdings were at 69%.

The report predicts a further rise in total household savings in FY23, primarily attributed to the increasing trend in physical savings.

On the financial front, the report highlights challenges. Financial savings, calculated on a net basis, have been impacted by a surge in financial liabilities, rising by 76% year-on-year in FY23. This has led to a decline in net financial assets, with financial liabilities as a percentage of GDP steadily increasing from 4.1% in FY19 to 5.8% in FY23.

The data also suggests a changing landscape in borrowing, with a shift from 79% bank borrowings in FY19 to 75% in FY23, indicating a growing influence of non-bank institutions.

A notable trend identified in the report is the shifting preference of household savings from traditional bank deposits, including non-bank deposits, towards capital markets. In FY2001, bank deposits constituted 39% of total financial savings, compared to 37% in FY2023. Capital markets, on the other hand, saw an increase from 4% to 8% during the same period.

With the improvement in financial literacy, the report notes a steady increase in savings directed towards life insurance, provident funds, and pension funds. These categories have seen growth from 34% of total financial savings in FY2001 to 40% in FY2023.

The report also highlights a decline in savings parked as currency, dropping from 12% of the total in FY22 to 7% of gross financial assets in FY23. This shift is seen redistributing towards bank deposits, which rose from 22% to 35% during the same period.

The report identifies per capita income and real interest rates as the main drivers of financial savings. While rising per capita income has a weak positive effect on savings rates, the real interest rate is crucial in influencing household saving rates in the short run.

The report provides valuable insights into the evolving landscape of household savings in India, emphasizing the dominance of real estate and the ongoing shifts in financial preferences.