The claim that Indian net household financial savings have declined to a 50-year low is misleading, according to research published by the State Bank of India (SBI) on Thursday. The bank's economists argued that the saving capacity of households should not solely be measured by financial savings, but also consider physical savings.

SBI's Group Chief Economic Adviser, Soumya Kanti Ghosh, suggested a shift from financial savings to physical savings over the past two years, potentially driven by a low-interest rate regime. He indicated a significant long-term relationship between housing loans and household savings in physical assets. "Every Rs 1 increase in housing loans has resulted into Rs 2.12 increase in household's savings in physical assets for the 14-year period ended FY22," Ghosh said.

In its latest monthly bulletin, the Reserve Bank of India (RBI) showed that household financial savings had declined to 5.1% of GDP in FY23, compared with 7.2% in the previous year and 7.6% in the post-pandemic period. However, SBI noted that this decrease needed to be juxtaposed with an increase in borrowing from commercial banks, where 55% of the credit over the last two years has gone toward housing, education, and vehicle loans.

Ghosh pointed to the recovery in the real estate sector and an increase in property prices as further evidence of a shift to physical savings. Data released by RBI last month showed that the house price index recorded an annual growth of 3.5% in Q1:2022-23 as compared with 1.8% in the previous quarter and 2.0% a year ago.

Despite the fall in financial savings, SBI expects total savings to rise in FY23 compared to the previous year due to an anticipated increase in the share of physical savings. The bank predicts that physical savings will make up nearly 70% of total household savings in FY23, up from 48% in FY21, reaching a level last seen in FY12.

SBI's research arm, SBI Ecowrap, stated that the sharp rise in financial liabilities may reflect a drawdown in precautionary saving during the pandemic. Out of an Rs 820 crore increase, Rs 710 crore was accounted for by an increase in household borrowing from commercial banks, with most loans going toward housing, education, and vehicle purchases.

India saved 3.5% of the GDP in FY23 in shares and debentures, insurance, provident and pension funds. Deposits accounted for 4% of GDP. The total gross financial savings in the economy were 10.9% in FY23.

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