The RBI's stance on rates has provoked the noisy debate of Growth vs Inflation, however, what about the interest of most fixed income savers in India.
Trading, investing in equity is still seen by most as a form of gambling. Hardly 5% of the general mass engage their hard earned funds in equity market. Most people are vivid savers in debt funds such as bank fixed deposit.
In the Inflation vs Growth debate that surrounds RBI's action last week, the interest of Saver's is hardly being talked about. Last week, when RBI did not approve the rate cut, the industry and finance minister himself did not took much time to express their displeasure. The RBI thinks as long as inflation is high, interest rates cannot be lowered and the opposition thinks cut in interest rates will induce growth.
Let us now focus on the rates themselves, lower the rate of interest in deposits, lower the rate of interest on borrowers. Who is the largest borrower? The government itself. Who is the depositor? Its the general mass of India, who put their hard earned money in bank safe deposits. Especially, the ordinary people who use no other financial schemes.
A huge amount of money is borrowed by the government directly by post office schemes to banks. So, if the rates are reduced, certainly the borrower(government) will pay its depositor(general mass) less for its borrowings. This is the direct effect. Whether this will be able to bring down inflation is secondary and might not happen.
If inflation does not react to rate cuts, it is going to be poisonous. The Savers will then be left with fatal combination of high inflation and low interest rates. His real, inflation adjusted deposit will give zero or negative returns.
This issue is deeply tied with retirement benefits in India. Most senior citizen depend upon the returns from their fixed income for their cost of living. Moreover, inflation in health care is comparatively more, which could paralyze these senior citizens in case of emergency. In addition the inflation in fuel and electricity has induced inflation in almost all sectors. Based on this, ensuring a decent return on fixed income is important. Putting this in other word, the poor and the rich have voice, but not the senior citizens of middle class.
Lowering rates when inflation is high is like taking money from these people and putting it into government.
Thank you.
Trading, investing in equity is still seen by most as a form of gambling. Hardly 5% of the general mass engage their hard earned funds in equity market. Most people are vivid savers in debt funds such as bank fixed deposit.
In the Inflation vs Growth debate that surrounds RBI's action last week, the interest of Saver's is hardly being talked about. Last week, when RBI did not approve the rate cut, the industry and finance minister himself did not took much time to express their displeasure. The RBI thinks as long as inflation is high, interest rates cannot be lowered and the opposition thinks cut in interest rates will induce growth.
Let us now focus on the rates themselves, lower the rate of interest in deposits, lower the rate of interest on borrowers. Who is the largest borrower? The government itself. Who is the depositor? Its the general mass of India, who put their hard earned money in bank safe deposits. Especially, the ordinary people who use no other financial schemes.
A huge amount of money is borrowed by the government directly by post office schemes to banks. So, if the rates are reduced, certainly the borrower(government) will pay its depositor(general mass) less for its borrowings. This is the direct effect. Whether this will be able to bring down inflation is secondary and might not happen.
If inflation does not react to rate cuts, it is going to be poisonous. The Savers will then be left with fatal combination of high inflation and low interest rates. His real, inflation adjusted deposit will give zero or negative returns.
This issue is deeply tied with retirement benefits in India. Most senior citizen depend upon the returns from their fixed income for their cost of living. Moreover, inflation in health care is comparatively more, which could paralyze these senior citizens in case of emergency. In addition the inflation in fuel and electricity has induced inflation in almost all sectors. Based on this, ensuring a decent return on fixed income is important. Putting this in other word, the poor and the rich have voice, but not the senior citizens of middle class.
Lowering rates when inflation is high is like taking money from these people and putting it into government.
Thank you.
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