Interest Rates: Depositors Cannot Match Decibel Capacity of Big Business - Vivek Kaul's Diary
Free Reports

Interest Rates: Depositors Cannot Match Decibel Capacity of Big Business

Aug 4, 2016

28

On August 9, 2016, the outgoing Reserve Bank of India(RBI) governor Raghuram Rajan, will present his last monetary policy statement.

Indications are that Rajan may not cut the repo rate. This, for the simple reason that the difference between the repo rate and the rate of inflation as measured by the consumer price index has narrowed since June 7, 2016, when the last monetary policy statement was presented. The repo rate is the rate of interest that the RBI charges banks when they borrow from it, on an overnight basis.

The last monetary policy statement was presented on June 7, 2016. The RBI had held the repo rate steady at 6.5 per cent. While presenting the June 2016 policy, the RBI was looking at the rate of inflation as measured by the consumer price index, for the month of April 2016. In April 2016, the rate of inflation rose to 5.39 per cent, in comparison to 4.83 per cent in March 2016.

The difference between the repo rate and the rate of inflation stood at around 111 basis points (6.5 percent minus 5.39 per cent). One basis point is one hundredth of a percentage. As governor Rajan said in the monetary policy statement: "Retail inflation measured by the consumer price index (CPI) rose more sharply than expected due to a more-than-seasonal jump in food prices...CPI inflation excluding food and fuel edged up in April, driven by prices of petrol and diesel embedded in transport and communication. Clothing and footwear also registered moderate increases in inflation. Services inflation remained elevated on account of house rents, water charges, tuition fees and taxi/auto fares. Excluding petrol and diesel from this category, inflation was sticky and above 5 per cent."

In the monetary policy to be presented next week, the RBI is likely to look at the inflation as measured by the consumer price index for the month of June 2016. In June 2016, the rate of inflation stood at 5.77 per cent against 5.76 per cent in in May 2016.

This means that the difference between the repo rate and the rate of inflation has narrowed to 73 basis points (6.5 per cent minus 5.77 per cent) against the 111 basis points earlier. In this scenario, it is highly unlikely if Rajan will cut the repo rate. My guess is that if it wasn't Rajan's last monetary policy, he would have raised the repo rate. But that is something that he is likely to leave to his successor.

Meanwhile, as the monetary policy approaches next week, you are likely to see big business represented by lobbies like CII, FICCI and ASSOCHAM, demanding lower interest rates. Lobbies like CREDAI, which represent real estate companies are likely to do the same. If Rajan does not cut the repo rate, such statements will be made after August 9, 2016, as well. If he does cut the repo rate, big business will say that further cuts are required.

Advertisement
 EXPOSED: The Crony
Socialism of Narendra Modi...
 
 he Crony Socialism of Narendra ModiWhile crony capitalism has taken a beating under Narendra Modi, crony socialism is alive and kicking.

Yes, the public sector is back and so are the HUGE losses!

And in case you thought that this is a problem which we've always had...well, you are in for a surprise. The public sector is burning money at probably the fastest pace ever.

And Vivek Kaul reveals it all in his latest Special Report - "The Crony Socialism of Narendra Modi".

A must read for everyone who is interested in the present state of the country and where it is headed...Plus, it's Absolutely Free!

So, don't delay...Click here to download this Special Report right away!
 

This will happen because there is a great belief among these companies that lower interest rates lead to faster economic growth. Of course, as I have often explained in the past, the relationship between interest rates and economic growth is not as simplistic as big business makes it out to be.

Further, big business in India is currently highly leveraged (i.e. it has borrowed much more than it is in a position to repay. It is also finding it difficult to keep paying the interest on the debt that it has taken on). In this scenario, it needs lower interest rates. But lower interest rates hurt crores of depositors who have invested their money in fixed deposits.

As D Subbarao, former governor of the Reserve Bank of India, writes in Who Moved My Interest Rate?-Leading the Reserve Bank of India Through Five Turbulent Years: "The narrative of our growth-inflation debate is also shaped by what I call the 'decibel capacity'. The trade and the industry sector, typically a borrower of money, prioritizes growth over inflation, and lobbies for a softer interest-rate regime."

While there is nothing wrong in the big business lobbying in favour of something that works well for it, it is clearly not a level playing field that we are talking about in this case. As Subbarao writes: "The Reserve Bank of India cannot afford to forget that there is a much larger group that prioritizes lower inflation over a faster growth. This is the large majority of public comprising of several millions of low-and-middle-income households who are hurt by rising prices and want the Reserve Bank to maintain stable prices. Inflation, we must note, is a regressive tax; the poorer you are, the more you are hurt by rising prices."

Also, rising prices bring down the real rate of return on fixed deposits. The real rate of return on fixed deposits is the nominal rate of interest on fixed deposits minus the prevailing rate of inflation. This hurts the older lot which depend on fixed deposits to meet their regular income. It also hurts the younger lot which uses fixed deposits to create a corpus for their future. This can be for the education of their children or to set aside some money for their retirement. This could lead to the young putting aside a higher amount of money to save for the future, and in the process bring down their consumption.

Lower real interest rates hurt those dependent on fixed deposits either for a regular income or to create corpus for the future. Further, unlike the big business, depositors are not organised to lobby what is good for them.

As Subbarao writes: "The business sector is organized, has a platform for voicing its demand and even has an opportunity to present its point of view to the governor in the pre-policy consultation meeting. On the other hand, the large majority of the public that is hurting under inflation is scattered and unorganized, has no avenue to voice its concern and does not even have the privilege of a pre-policy meeting with the governor."

And since this lot is unorganized, there is an obligation on the RBI "to bend over backwards to listen to this voice of silence". Governor Rajan hasn't disappointed on this front up until now. Chances are he won't even with his last monetary policy statement scheduled for next week.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

Which Gods Will Bring Down the US Empire? August 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?
Will They Haul Off Trump's Statue, Too? August 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
Farm Loan Waivers: Why Bad Economics Makes for Good Politics August 14, 2017
It is because the negative effects of the waivers aren't clearly visible.
The Most Important Innovation in Finance Since Gold Coins August 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

Equitymaster requests your view! Post a comment on "Interest Rates: Depositors Cannot Match Decibel Capacity of Big Business". Click here!

1 Responses to "Interest Rates: Depositors Cannot Match Decibel Capacity of Big Business"

BRIJ KRISHANKAUL

Aug 4, 2016

Mr vivek kaul has amply made it clear that RBIgovernor should look to the people the majoroty population older as well as younger who are affected by the cut in repo rates. The corporate lobby is strong to put forth their argument ,but should it be obeyed by the RBI everytime at the cost of majority silent sufferers.Really a matter to ponder.

Like 
  
Equitymaster requests your view! Post a comment on "Interest Rates: Depositors Cannot Match Decibel Capacity of Big Business". Click here!