RBI Report: Bookkeeping of the Middle Class in the Midst of Inflation

The middle class in India has been significantly impacted by inflation and the subsequent rise in interest rates, according to a recent report by the Reserve Bank of India (RBI). As household expenses continue to increase, individuals with monthly salaries of less than Rs. 60,000 face a greater financial burden. Despite these challenges, the middle class has not hesitated to take on additional loans, including home loans and vehicle loans. In fact, this segment accounts for 34% of all types of loan EMIs in the country. The annual Financial Stability Report (FSR) published by the RBI highlights the potential risks associated with the increased share of EMIs for this segment, which has risen to 40%.

Savings Decrease and Investments Increase

The report reveals a significant change in the financial behaviour of the middle class. Prior to the COVID-19 pandemic, middle-class individuals had deposited Rs. 12.19 lakh crore in banks, whereas now the amount has reduced to Rs. 6.95 lakh crore. Furthermore, investments in mutual funds have increased from Rs. 64 thousand crore to Rs. 1.60 lakh crore, indicating a shift towards greater investment activity. Notably, 95% of those who have increased their investments in mutual funds belong to the middle class. While savings have decreased by almost half, investments have grown by two and a half times. This trend has emerged despite the increase in EMIs due to rising interest rates, which have gone up by 2.5%.

Lower-Income Groups Face Heavier Burdens

The RBI report also highlights the heavy burden faced by lower-income groups, where approximately 80% of their income goes towards paying EMIs. In the income bracket of Rs. 60,000 to Rs. 85,000, only 6.4% of individuals are at risk of defaulting on their EMIs. However, there is a concerning segment within this category, with 10% of individuals paying 80% of their declared income solely towards EMIs. Ajay Vyas, former executive director (ED) of UCO Bank, explains that the middle class has withdrawn money from bank deposits and redirected it towards the stock market and mutual funds, resulting in higher returns and increased investment.

Home Loans: A Growing Trend

The report also sheds light on the home loan market, revealing interesting patterns based on income groups:

- Monthly earners between Rs. 20,000 and Rs. 42,000 account for 8% of home loans.

- Income earners between Rs. 42,000 and Rs. 60,000 make up 12% of home loans.

- Individuals with incomes between Rs. 60,000 and Rs. 85,000 constitute 15% of home loans.

- The share of individuals earning between Rs. 85,000 and Rs. 1.40 lakh is 22% in the home loan segment.

Increase in Overseas Investments

In a separate RBI report, it was revealed that Indians have invested a total of $27.1 billion (Rs. 2.2 lakh crore) abroad in the last three months, while foreign investment in India stood at $21.4 billion (Rs. 1.75 lakh crore). This reflects a 64.1% increase in investments made by Indians overseas during the second quarter. The report only considers investments made by Indian citizens and does not include investments made by NRIs. The investments made abroad by Indians include fixed assets such as properties and land, as well as investments in stock markets and business ventures.

The RBI's Financial Stability Report provides insights into the financial behaviour of the middle class in India. Despite facing the challenges posed by inflation and rising interest rates, the middle class continues to actively participate in the loan market, particularly in home loans and vehicle loans. There has been a significant shift from savings to investments, as individuals seek higher returns. Additionally, Indians have been increasingly investing abroad, while foreign investors continue to show interest in the Indian market. These trends indicate the evolving financial landscape and the changing dynamics of the middle-class segment in the country.