Indian Savers and Negative Real Interest Rates
(Please see Indian economy data bank for latest updates, since Jun2024, on India's real interest rates)
(note:
Updates with latest information charts as at the end of 31Mar2024, 29Feb2024, 31Dec2023, 30Nov2023, 30Sep2023, 30Aug2023, 30Jun2023, 31Mar2023, 31Jan2023, 31Dec2022 and 30Nov2022 are available at the end of this blog - regular monthly updates are available since Sep2021 on this blog post)
Indian savers have been getting a raw deal with interest income falling faster even as inflation has been going up persistently. One needs to focus on real interest rates rather than nominal interest rates.
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Read more: Fed Tapering is Postponed
---------------------- Real interest rate is the nominal interest rate minus inflation rate. For example, inflation (as
measured by consumer price inflation or CPI) rate for June 2021 is 6.26 per
cent and Reserve Bank of India's (RBI is India's central bank) benchmark interest rate called repo rate is 4.00 per cent, thus giving a real interest rate of minus 2.26 (=4.00 - 6.26) per
cent for savers.
Effectively, over a one year period, with negative real interest rate of 2.26 per cent, Rs 10,000 would be worth only Rs 9,774.
Alternatively, if you compare one-year term
deposit rate (bank fixed deposit rate for one year averages 5.20 per cent) with inflation rate of 6.26 per cent, it gives a real interest rate of minus 1.06 (=5.20 - 6.26) per
cent.
Details of term deposit rates, CPI inflation rate and repo rate for the period from September 2019 to June 2021 are given in Table 1 below.
Live example
A senior citizen (60 years and above), two years ago, made a term / fixed deposit of Rs 400,000 for two years in a major bank with the then interest rate of 7.30 per cent per year, fetching him a total interest income of Rs 62,270.
The fixed deposit matured yesterday. After taking interest income, he renewed the principal of Rs 400,000 for another two-year term at yesterday's interest rate of 5.50 per cent per year--which would fetch him an interest income of just Rs 46,170 in the next two years.
Effectively, he would be losing Rs 16,000 (Rs 62,270 - Rs 46,170) or 25 per cent of previous period income. With such a huge loss of income, the suffering of depositors, especially, pensioners is immeasurable.
Inflationary pressures
India's monetary authority, RBI, is supposed to keep inflation rate (CPI inflation) in the range of 2.00-6.00 per cent. But as can be seen from the given table, inflation has been persistently above RBI's upper bound of 6.00 per cent between December 2019 and June 2021, except for a few months in between.
After the COVID-19 pandemic hit India severely, incomes of households have come down drastically due to untimely, draconian and capricious lockdowns by Indian governments. With inflation persistently above 6.00 per cent in the past 20 months, high consumer prices have hit households badly.
Prices of daily essentials like, edible oil, vegetables, fruits and fuel LPG cylinder have gone up by 30 to 80 per cent in recent months affecting the lower strata of income pyramid the most.
Despite persistently elevated inflationary pressures in the economy, RBI has kept interest rates very low for 16 months continuously. RBI seems to be interested more in boosting economic growth.
The objective of high economic growth is laudable, but the heavy burden of growth engine should be taken more on the fiscal side (mainly with tax incentives and income support for the vulnerable sections) by the Indian government.
But the Indian government headed by prime minister Modi and state governments would have none of it. Of all the major global economies, India spent the lowest, at less than two per cent of GDP, to alleviate the suffering of people in times of Corona Virus pandemic.
India Inc has got a powerful lobby demanding lower interest rates at all points of interest rate cycles. But Indian savers don't have any such lobbying advantage.
It's time the fiscal and monetary authorities recognised the problem being faced by Indian savers and hiked interest rates, keeping interests of both savers and debtors in balance.
Table 1 (click on the image for a better view):
Table 2 (from Jan2019 to Dec2020) (click on the image for a better view):
References:
My tweet thread dated 14Jun2021
My blog dated 20Sep2020
- - -
P.S. Updated chart 22Apr2024 (data end-31Mar2024) >
As
on 31Mar2024, real interest rates in India are positive 1.65
percent -- for seven months continuously, real rates are positive in India.
P.S. Updated chart 12Mar2024 (data end-29Feb2024) >
As
on 29Feb2024, real interest rates in India are positive 1.41
percent -- for six months continuously, real rates are positive in India.
P.S. Updated chart 13Jan2024 (data end-31Dec2023) >
As
on 31Dec2023, real interest rates in India are positive 0.81
percent -- for four months continuously, real rates are positive in India.
India's policy repo rate has remained unchanged at 6.50 percent for the past one year, though CPI inflation has been all over the place during the period -- moving between a high of 7.44 percent in Jul2023 to a low of 4.31 percent in May2023. Official inflation numbers do not match with the actual price increases the citizens undergo on a daily basis.
P.S. Updated chart 31Dec2023 (data end-30Nov2023) >
As
on 30Nov2023, real interest rates in India are positive 0.95
percent -- for three months continuously, real rates are positive in India
P.S. Updated chart 13Oct2023 (data end-30Sep2023) >
As
on 30Sep2023, real interest rates in India are positive 1.48
percent, as 'declared and official' CPI inflation declined to 5.02 percent for Sep2023.
P.S. Updated chart 21Sep2023 (data end-31Aug2023) >
As on 31Aug2023, real interest rates in India are negative at 0.94 percent. After five months of positive real rates, real interest rates are once again in negative territory in July and Aug2023.
Negative real interest rates are one of the biggest economic failures of PM Modi government in the last four years. It's quite surprising that term deposit rates of major banks remained the same in the past eight months even as CPI inflation is at one year high.
P.S. Updated chart 27Jul2023 (data end-30Jun2023) >
As on 30Jun2023, real interest rates in India are positive, with 1.69 percent.
P.S. Updated chart 17Apr2023 (data end-31Mar2023) >
As on 31Mar2023, real interest rates are positive, with 0.84 percent.
P.S. Updated chart 14Feb2023 (data end-31Jan2023) >
After two months of positive real rates, India slipped promptly to negative real interest rates. (RBI raised repo rate to 6.50% effective 08Feb2023)
In the pat 39 months, we've experienced two months of positive real rates. CPI inflation for Jan2023 is 6.52 percent. Image >
P.S. Updated chart 13Jan2023 (data end-31Dec2022) >
CPI inflation for Dec2022 further declined to 5.72 percent, which is the lowest since Dec2021 -- for the second month continuously, real interest rates are positive -- real interest rate is the excess of policy repo rate over the CPI inflation rate -- for Dec2022, it is 0.53 percent (6.25 - 5.72) -- see image below (click it for a better view) >
P.S. Updated chart 12Dec2022 (data end-30Nov2022) >
On 12Dec2022, India's CPI inflation for Nov2022 came in at 5.88 percent, the lowest since Dec2021, even as Reserve Bank of India (RBI) raised Repo rate by 35 basis points to 6.25 percent on 07Dec2022. For the first time since Oct2019, real interest rate (LAF repo rate minus CPI inflation) has turned positive, slightly though, as CPI inflation print for Nov2022 is lower at 5.88 percent. Real interest rates turning positive after a gap of three years is good for savers, and let us see how long this continues.
P.S. Updated chart 15Nov2022 >
P.S. Updated chart 12Oct2022 >
P.S. Updated chart 16Jun2022 >
P.S. Updated chart 12May2022 >
P.S. Updated chart 13Apr2022 >
Updated chart 17Mar2022 >
Updated chart 15Jan2022 >
Updated chart as on 17Dec2021 showing negative real interest rates in
India (please click on the image for a better view) >
Updated chart as on 29Nov2021
Updated chart as on 25Sep2021 showing negative real interest rates in
India (please click on the image for a better view) >
Updated chart as on 14Aug2021 showing negative real interest rates in India (please click on the image for a better view) >
Disclosure: I've vested interested
in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if
any.
Disclaimer: The analysis and
opinion provided here are only for information purposes and should not be construed
as investment advice. Investors should consult their own financial advisers
before making any investments. The author is a CFA Charterholder with a vested
interest in financial markets.
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