Low-interest rates prompted households to shift to physical assets: SBI Research

A low-interest rate regime in India during the pandemic resulted in a "paradigm shift" of households' savings from financial to physical assets, according to a report by SBI Research.

In its study, it found that 55 per cent of the retail credit to households in the last two years has gone to housing, education, and vehicle purchases.

The report said arguments that the household savings fell to a 50-year low were “completely misleading.”

It backed its statement by saying household savings must be looked into as a sum total of physical and financial savings and not in isolation.

The net financial savings of the household sector moderated to 5.1 per cent of GDP in 2022-23 from 11.5 per cent in 2020-21 and 7.6 per cent from pre-pandemic 2019-20.

SBI Research said there is a significant long-run relationship between housing loans and household savings in physical assets.

It argued every Re 1 increase in housing loans has resulted in a Rs 2.12 increase in household savings in physical assets for the 14-year period ended 2021-22.

“The decline in net financial savings of households has resulted in a concomitant increase in household savings in gross physical assets,” it said.

“In fact, savings in physical assets which accounted for more than two-thirds of household savings in 2011-12, had declined to 48 per cent in 2021-21.

However, the trend is again shifting and the share of physical assets is expected to reach 70 per cent level in 2022-23, due to decline in the share of financial assets,” the research report said.

SBI Research believes that the shift to physical assets could have been also triggered by a recovery in the real estate sector led by the increase in property prices.