Resilience in Indian Household Finances amid Rising Liabilities

• 04 Jan 2024

Despite a notable surge in household financial liabilities from 3.8% of GDP in FY22 to 5.8% in FY23, India remains resilient against defaults, as affirmed by the Reserve Bank of India's (RBI) latest Financial Stability Report (FSR).

Key Points

• Limited Default Risk: The FSR highlights the limited risk of defaults by households despite increased exposure to higher mortgage payments and floating rate interest.
• Rapid Rise in Liabilities: Household financial liabilities experienced a rapid ascent, reaching 5.8% of GDP in FY23, while financial assets only moderately adjusted from 11.1% in FY22 to 10.9% in FY23.
• Transmission of Repo Rate Hike: The report notes that the 250 basis points hike in the repo rate between May 2022 and February 2023 has been fully transmitted to home loans, owing to banks linking interest rates to external floating benchmarks.
• Shift in Savings Composition: The steep rise in borrowings, particularly for mortgages and vehicles, has led to a compositional shift in household savings, favouring physical assets.
• The RBI suggests this shift could contribute to gross capital formation, supporting the private investment cycle and overall economic growth.
• Long-term Relationship: Economic experts, posit a long-term relationship between housing loans and household savings in physical assets, signalling a potential paradigm shift in the last two years.
• Normalisation of Net Financial Savings: Recent data indicates a normalisation of household net financial savings (HNFS) towards pre-pandemic trends, rising to 7% of GDP in Q4 FY23 from 4% in the previous quarter.
• Moderation in Household Debt: Despite the increase in financial liabilities, household debt in India remains comparatively lower than in other emerging market economies, posing limited systemic concerns, according to the RBI.
• Trends in Household Savings: Gross household financial savings, which peaked at 15.4% of GDP in 2020-21, have reverted to pre-pandemic levels, standing at 10.9% in 2022-23. The debt service ratio (DSR) and household debt to GDP ratio remain among the lowest globally.