Other options before depositors
A significant development of relevance to depositors is the signing of an Agreement on February 20, 2015, between the Government of India and the Reserve Bank of India (RBI), setting out a target for inflation, based on the Consumer Price Index (CPI) of six per cent for January 2016 and for the financial year 2016-17 and all subsequent years, four per cent, with a band of +/- 2 per cent.
It is unfortunate that over the years the track record shows that effective control over inflation has weakened in India. India, at one time, could pride itself on having one of the lowest inflation rates among the Emerging Market Economies (EMEs). But in recent years, we have had one of the highest inflation rates.
The devastation inflicted on the common person can be highlighted by a few numbers. Let us say a person retires at the age of 60 years in 1993-94 with a corpus of Rs one crore, which at that time would appear to be a very comfortable amount to generate an adequate retirement income. The corpus of Rs one crore in 1993-94 would, in real terms, amount to Rs 20.6 lakh in 2013-14 and the individual at the age of 80 years would just not be able maintain the standard of living at age 60 years (Calculations derived from Tinesh Bhasin, Business Standard, March 9, 2015).
It would be pertinent to also look at the Cost Inflation Index used for purposes of taxation. With 1993-94 as base (100), the index for 2013-14 would be 385 or, in other words, a sum of Rs 100 in 1993-94 would, in real terms, be only Rs 26 in 2013-14.
In the context of the target, it is to be seen how the RBI sets out the Operating Procedure for Monetary Policy. It is hoped that the RBI would unfurl the Operating Procedure at its next Policy Review on April 7, 2015. Given that the CPI inflation rate for February 2015 of 5.37 per cent, is fairly close to the six per cent upper band set out in the Agreement, basic logic would warrant that the RBI not reduce the policy repo rate (i.e.the rate at which it provides liquidity against the collateral of government securities).
Unfortunately, a practice has developed that close to the Policy Review date, India Inc. goes ballistic, pleading for a relaxation of policy; what is worse, the government joins the cheer squads on the sidelines, advocating a reduction of the repo rate. Despite the present government's avowed stance that it would respect the autonomy of institutions, when it comes to monetary policy, the present government, much like the previous government, roars for a reduction in policy repo rates. It remains to be seen, whether, in view of the February 20, 2015 Government -RBI Accord, the government continues it public statements advocating easing of monetary policy. Depositors should track government pronouncements in the days before the April 7, 2015 Policy Review. The fact that the Wholesale Price Index (WPI) for February 2015 shows a negative rate of 2.06 per cent, would render even louder the noise generated by India Inc.
Monetary Policy Committee (MPC)
Another signal would be the approach the government takes while deciding on the composition of the proposed MPC. There are sharp differences on this matter. The Financial Sector Legislative Reforms Commission (FSLRC) recommends that there should be an eight-member MPC, consisting of two RBI executives, five external members appointed by the government and a non-voting government representative who would have the right to be heard. The FSLRC then provides for a veto for the Governor who would be required to give a public explanation when using the veto.
The Urjit Patel Committee recommends a five-member MPC, of which there would be three RBI executives and two external members and there would be no veto for the Governor. In the case of absence of a member and there being a tie, the Governor would have a casting vote.
It hardly needs to be emphasised that accountability is always the responsibility of the executive and the FSLRC recommendation of a majority of External members is a ridiculous recommendation, which should simply be discarded by the government.
The formal constitution of an MPC will require legislative changes. But if the Urjit Patel recommendations are accepted, there would be merit, pending legislation, in an informal MPC on the lines of the Urjit Patel recommendations. The seriousness of the government's intent in the Accord would be reflected in its approach to the composition of the MPC.
A major concern of depositors should be whether the policy repo rate is reduced on April 7, 2015, or earlier. If there is a reduction in the policy rate, depositors must recognise that there would soon be a reduction in term deposit rates. Without waiting for a reduction in the policy repo rate, depositors should lock themselves into longer term deposits. Also, where available in banks, depositors should put their funds in Sweeping Accounts - when the Savings Bank deposit level falls below a specified level, the Sweeping Account is reduced and balances in the Savings Account are replenished and vice versa. Invariably, depositors have a core savings bank balance which is never used. Depositors should move out of the savings bank such deposits and move to either Sweeping Accounts or term deposits. They have an erroneous sense of security that bank deposits are insured. Such insurance is only up to Rs one lakh per bank. Only 31 per cent of total deposits are covered by deposit insurance.
Bank depositors must proactively look for other avenues of investments. Gold, silver, mutual funds and Real Estate Investment Trusts (REITS) should be given serious attention. Only an exodus of depositors would bring the advocates of lower deposit rates to their senses.
Note: This article was first published in The Freepress Journal on March 23, 2015. Syndicated.
This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.
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