The Hindu : Falling with the interest rates

Online edition of India's National Newspaper
Monday, Dec 23, 2002

Opinion

Opinion - Editorials

Falling with the interest rates

A FUNDAMENTAL OBJECTIVE of the monetary policy, over the years, has been to bring about a softer interest rate regime in the country. Few doubt the policy's success in this area. By nearly all parameters the interest rates have dropped very sharply. The benchmark interest rates such as the bank rate are at historic lows. Equally relevantly the RBI feels that the present softer interest regime is sustainable over the medium term if the rate of inflation continues to be low. As a follow-up to the monetary policy's success, the RBI has been exhorting banks and financial institutions to pass on the benefit of the lower interest rates to their borrowers. Although certain well-known financial sector rigidities, such as a high level of non-performing assets, have stood in the way of a fuller realisation of the potential of the softer rate regime, important segments such as the housing finance sector have benefited immensely.

Unfortunately, the thrust of the monetary policy debates in India have tended to look at the picture almost exclusively from the point of view of the financial sector's borrowers. The discussions on monetary policy, such as the one on the direction of the interest rates, have been one-dimensional; the concerns of the savers, especially the more vulnerable among them, have largely been ignored. Last year, at the Government's prompting commercial banks started offering senior citizens a marginally higher yield on their fixed deposits. However, this has proved to be a symbolic gesture: along with the sharp cuts in the interest rates including deposit rates, those payable to senior citizens have also been brought down drastically. Those who depend exclusively on interest income for a livelihood are much worse off today compared to a year ago. It is in that context that the Finance Minister, Jaswant Singh's recent statement that pensioners, senior citizens and others should earn higher rates on their investments has come as a welcome relief to the monotonously unsympathetic and insensitive arguments marshalled in favour of market denominated yields ignoring the plight of the vulnerable classes. Many of them have seen their incomes fall by as much as 60 to 80 per cent compared to a few years ago.

Hopefully, the Finance Minister will be able to follow up on his statement. At the very least there is a need to look at the issue of falling yield from a much larger socio-economic perspective. That there are no social security schemes in India is well known. Even the workers in the organised sector are facing the prospect of much lower returns from their pension and provident fund contributions. Those in the unorganised sector naturally suffer more in the absence of any kind of safety net but that is no argument against nurturing the savings habit among those who can. Significant social and cultural changes under way, such as the increase in longevity, can hardly be ignored either. There is no employment market for those who have retired. An expectation of a longer life means that larger savings will have to be accumulated during one's working life. An unthinking policy of indiscriminate cut in the yields on savings instruments can cause plenty of distress and, as the last budget's tinkering with the tax rebates and exemptions demonstrated, can be politically damaging.

Furthermore, there are sound economic arguments to support the Finance Minister's thinking. Alternate investment channels — the share market, non-banking finance companies and mutual funds — have disappointed or become risky. Traditionally, the public sector banks have through their fixed deposits provided a modicum of social security. Today, they too like their newer private sector counterparts are reducing their interest rates with a vengeance. Ironically, their borrowers too continue to complain of high cost of borrowing and inadequate credit delivery. Finally, for nurturing long-term savings the argument of aligning savings rates with inflation is not practicable. Currently at around 5 per cent, there can be no guarantee that it will not go up. Banks which are now offering on an average 7.5 per cent on a three-year deposit will do well to more than protect the real returns more convincingly.

Printer friendly page
Send this article to Friends by E-Mail

Opinion

Stories in this Section

Petrol, patronage, probe

Falling with the interest rates

Crimes against women

Buddhism, Bhakti and the VHP - I