Tuesday, September 28, 2021
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Rate of interest on bank deposits

In an economically developed country like ours interest rate is breaking through the floor and not going through the roof. In the 90’s the interest in bank deposits was skyrocketing and it seemed that money would double in five years. Today the scenario is completely different. Frederic Mishkin former Federal Reserve governor and currently professor of Macroeconomics in Columbia Business School once ridiculed the concept of negative rate of interest as a bizarre idea where the lender pays the borrower for money lent. Today he does not consider the concept as weird as he thought earlier. That is the problem excess liquidity causes in an economy.

You look at Japan. Inflation is ridiculously low and surfeit of liquidity causes interest rates to go negative creating a disincentive for the savers. Hence, some inflation is good for the economy and at least the nominal interest rates would always be positive. Unfortunately for a country like ours where the propensity to save is very high irrespective of whether the real rates are positive or otherwise, very low interest rates causes tremendous pain, as there is no social security and pensions are ridiculously low. The Government should understand the plight of the poor and middle classed pensioners. Though they have no control over the movement of interest rates, should abolish income tax on interest on deposits for at least senior citizens. When a Chairman of a Bank visited another Bank branch he was flabbergasted to see the rate card displayed at the entrance and made a sarcastic remark saying how long the Bank sustain such a high interest rate and those words came true after 7 years.

The Reserve Bank of India lowered its repurchase rate by a surprise 25 bps to 6.25 per cent on October 4th, 2016, saying the stance of monetary policy remains accommodate and the decision will help to bring inflation rate back to central bank’s 4 per cent target in the medium-term while supporting growth. India’s consumer prices index rose 5 per cent year-on-year in August, easing from its 6 percent increase in July. The repo policy rate is now at its lowest since November 2010. Interest rate in India averaged 6.70 per cent from 2000 until 2016, reaching an all time high of 14.50 per cent in August of 2000 and a record low of 4.25 per cent in April of 2009. Interest rate are regulated by the Reserve Bank of India.

India interest rate forecasts are projected using an auto regressive integrated moving average (ARIMA) model calibrated using our analysts expectations. We model the past behaviour of India Interest Rate using vast amounts of historical data and we adjust the coefficients of the econometric model by taking into account our analysts assessments and future expectations. The policy makers should have proper planning and forethought about our emerging economy and help out the salaried class and make sure that senior citizens and pensioners get the maximum out of the hard earned money. There lies the real success.

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