Interest Rates: What About The Savers?
The thesis of parking the cost of making money cheaper on savers has run its course. Falling returns threaten the future of millions including senior citizens. India’s needs a plan to build a low cost economy.
By Shankkar Aiyar | Published: 06th December 2020 07:18 AM |
The expected happened. On Friday, the Monetary Policy Committee of the Reserve Bank of India kept the policy and reverse repo rate unchanged at 4 per cent and 3.35 per cent. Importantly, “the MPC also decided to continue with the accommodative stance as long as necessary.” What is ‘necessary’ is essentially a matter of perspective. There is no disputing that the need for systemic stability is paramount — to prop up consumption and investment, enable businesses and banks to remain afloat, and catalyse recovery.
The price of the lower rates and ‘accommodative stance’ is effectively being paid by savers. Consider this: consumer price inflation is around 7.5 per cent and “the MPC is of the view that inflation is likely to remain elevated”.
Interest on a regular savings account has slid rapidly and fetches barely 3 per cent and a one year deposit currently fetches less than 6 per cent — a 365-day deposit now nets less than what a savings account used to.
Unsurprisingly, SBI chairman Dinesh Khara believes deposit rates and, therefore, lending rates have bottomed out.
The hypothesis is that given India’s young population, the right approach is to facilitate consumption to boost investment and growth with lower interest rates. The question is who bears the cost, what about the interest of savers? What about the ageing and the pensioners who have worked a lifetime, planned for and depend on returns from investments in fixed income instruments?
As per estimates, in 2021, India’s 60- plus segment will cross 143 million — almost the population of Russia. Mind you the seniors are savers, consumers and also a vocal political constituency.
It is not just the ageing senior citizens who are dependent on interest income. As per the Deposit Guarantee and Insurance Corporation, India’s banks host over 2,350 million accounts with over Rs 134 lakh crore in deposits. Of these, more than 51 per cent of accounts are under the Rs 5 lakh and hold over Rs 68.7 lakh crore in deposits — money parked for education, marriage, or old age. The loss in returns affects the future plans of a large segment of savers depending on interest income.
It has been argued that a developing economy needs lower interest rates given the need for capital and the trade-off is unavoidable. Has the trade off paid off? Milton Friedman said, quite eloquently, that “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” The facts are scarcely convinced by the optics of intent. It is instructive to remember that the economy migrated from eight quarters of slowdown to lockdown and now to a technical recession.
Through the period, there has been a sustained clamour for lower interest rates as the panacea for propelling growth and the RBI has duly obliged. The question is has that assumption played out?
The poignant fact is the biggest beneficiaries have been the AAA corporates and the government — which is, given the inflation-repo matrix, effectively enjoying negative rates.
Even though policy rates slid from 8 per cent in 2014 to 4 per cent in 2020, the weighted average lending rates for borrowers, as per RBI data, is still above 9.5 per cent for most borrowers — thanks to lazy banking. The story for retail borrowers is not very different for home loans or for student loans hovering between 7 and 9 per cent.
The tragic irony is that borrowers continue to languish betwixt the optics of cheap money and the reality of rates. For sure the lower rates have afforded systemic stability during the pandemic — given the possible consequences of known unknowns, of moratoriums, restructuring et al. There is also the scent of optimism about recovery — buoyed to a large extent by GST collections, stock market indices, high frequency data and company results.
However, while the popular buzz is about a V-shape recovery, and that may be validated statistically, the political economy is headed for K-shape recovery. The big gains in corporate results are more about margins with the large entities gaining and the small and medium enterprises as also the informal sector at the cusp of the two legs of the alphabet K.
The expectation of lower interest rates catalysing growth rests on the law of necessary and sufficient conditions.
The expectation of higher consumption leading to demand-led investment is legitimate. But consumption by a young populace depends on desire and ability, on confidence about income and job security. In an environment coloured by pink slips, savers are more likely to turn austere and risk averse.
The thesis of parking the cost of making money cheaper on savers has run its course. The forthcoming budget affords an opportunity to craft medium- and long-term savings instruments which cater to the needs of savers. There is also a need to address the asymmetry in how savings in debt and equity is taxed — the definition of what is not risk capital is challenged by the failure of NBFCs like IL&FS and DHFL, of the crisis faced by depositors of Yes Bank and Lakshmi Vilas Bank.
It is time India reviewed what it takes to engineer a low-cost economy — and it would do well to start with the costs and benefits of government expenditure. There is no disputing that India’s aspiration of a $5 trillion economy needs capital. Achieving this target and sustaining growth calls for imagination and innovation in policy.
Shankkar Aiyar, political economy analyst, is author of ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’ which is releasing in May, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’; and ‘Accidental India’. You can email him at email@example.com and follow him on Twitter @ShankkarAiyar. His previous columns can be found here. This column was first published here.