Real Interest rates, a dream -Rohit Kumar Parmar [1]
In India the borrowers Government and Private sector, aided by lobbying by interest groups such as media, can muscle down the interest rates at the cost of the saving class, who normally earn negative real interest rates, and depletion of value of safe saving instruments.
Quoting Prof Sukhomoy Chakravarthy (former Member Planning Commission, Noted Economist and Professor, Delhi School of Economics)
as Chairman Committee to Review the working of the Monetary System (1985)
Some of the recommendations of the Committee, name and recommendations of which are unheard of by policy makers of today.
'The committee does not support the idea of pricing Credit too low for both the government and the commercial borrowers in public or Private Sector. This is attributable to the fact that low rates of Interest, encourages too much monetisation of Government debt, leaves too little for the Reserve Bank of India's refinance of banks, discourages effective use of Credit by borrowers, discourages financial savings and reduces profitability of Banks and other Financial institutions.'
The Committee's key recommendations on Deposit and lending rate of banks rates were:
'Deposits of maturity greater than 5 years should have a deposit rate which must be fixed at long term Ṗe + a positive real ' r ' not less than 2% p.a.'
This should apply to all small savings instruments.
Mark the word long term. Present revision of interest rates on small savings is in every quarter.
Further,
'One year deposit rate should be marginally positive in real terms. This implies that it should equal the short term, i.e. one year Ṗe + a small positive real ' r '.
Other deposit rates with varying maturity between 1 and 5 years should be left to be fixed by the banks within the limits of the above 2 rates.'
Given that inflation has been over 6.5 percent for the last two years, interest rate should not have been lower than 8 percent.
`The rate of interest on saving deposits should stay at 5% p.a.'
Presently the savings rate of SBI is 2.7 percent with endless bank charges, which were not a concept then. On the interest rate on savings, the depositor loses 2.3 percent.
'These rates must be fixed by the Reserve Bank of India.'
Does RBI fix these rates ?
The committee however, did not specify how frequently these rates must be changed and if the RBI's price expectations need to be revised when actual prices change differently.
[1] Author (Free lance, IES Retd, Former Senior Economic Adviser, Ministry of Consumer Affairs, Food and Public Distribution and former Adviser UNDP, Yemen P 4) has in posts
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