Why Worry About Negative Interest Rates-vrk100-14Jul2020
The following is a Tweet thread I made on Twitter, on 14 July 2020, on why Indian savers should worry about negative real interest rates.
The public tend to focus more on nominal interest rates rather than real ones, which is dubbed by economists as "money illusion." Indian savers enjoyed positive real interest rates for a few years, with all experts screaming about the damage the real rates caused the economy. 1/8
— RamaKrishna Vadlamudi, CFA (@vrk100) July 14, 2020
2/8 Former RBI governor Raghuram Rajan popularised the idea of providing positive real interest rate spread of about 1.5%-2.0% to savers. Once he's gone, we seem to have forgotten about real interest rates. The drumbeat changes to a different tune when people at the helm change.
— RamaKrishna Vadlamudi, CFA (@vrk100) July 14, 2020
3/8 CPI inflation in India made an epic comeback since Sep2019. Even though official CPI inflation figures don't match with the real price rise suffered by people, let us check how real interest rates (LAF repo rate minus CPI inflation) have moved between Jan2019 and Jun2020.
— RamaKrishna Vadlamudi, CFA (@vrk100) July 14, 2020
4/8 The data from Jan2019 to Jun2020 are attached. For comparison purpose, term deposit rates for more than one-year period are given, in addition to data related to LAF repo rate and CPI inflation. As can be seen, real rates have turned negative since Nov2019 > pic.twitter.com/asHhdGGRWi
— RamaKrishna Vadlamudi, CFA (@vrk100) July 14, 2020
5/8 Negative real interest rates show savers are getting lower deposit rates versus the inflation--means savings have no incentives for the past 10 months (this could tempt investors' toward riskier investing choices is a different matter). pic.twitter.com/Z80WmsphLQ
— RamaKrishna Vadlamudi, CFA (@vrk100) July 14, 2020
6/8 India's RBI cut interest rates by 250 basis points since Jan2019 and banks promptly cut interest rates drastically to protect their profits--which is natural. But it's also natural for banks / other lenders not to cut lending rates in a similar fashion (RBI ineffective). pic.twitter.com/fzxYG9xE9n
— RamaKrishna Vadlamudi, CFA (@vrk100) July 14, 2020
7/8 As savers have suffered the damage due to this negative real rates for the past 10 months, experts (who screamed about +ve real rates) seem to have forgotten about balancing the interests of savers. Hope this gets the attention of those at the helm.https://t.co/pFplIlOfw5
— RamaKrishna Vadlamudi, CFA (@vrk100) July 14, 2020
8/8 Maybe, Indian savers have to make sacrifices for reviving the moribund economy? Sadly, the saving community don't seem to have much lobbying power (the likes of LIC of India and other insurers enjoy such power).
— RamaKrishna Vadlamudi, CFA (@vrk100) July 14, 2020
Indian savers continue to enjoy negative real interest rates, with CPI inflation going rogue. Negative real interest rate has almost touched 3% last month.
— RamaKrishna Vadlamudi, CFA (@vrk100) August 14, 2020
Updated table containing fixed deposit rates, repo rate, CPI inflation and 10-year G-Sec yield > pic.twitter.com/rVaRjckBgP
@IGN Indian savers continue to enjoy negative real interest rates, with rising CPI inflation. Negative real interest rate has almost touched 3% last month.
— RamaKrishna Vadlamudi, CFA (@vrk100) September 14, 2020
Updated table containing fixed deposit rates, repo rate, CPI inflation and 10-year G-Sec yield >https://t.co/QpEswRiSlW pic.twitter.com/RRrHvVCHoe
References:
My Blog dated 05Aug2021
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