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Negative Interest

Interest rates in India have gone negative. It had better be just a blip.

By Ashish Gupta

Money: Absurdly cheap

Sometimes, keeping an eye on real statistics can be quite enlightening. In case you haven't noticed, the real interest rate-- the difference between interest rate and inflation -- has turned negative of late.

This was unthinkable even a couple of years ago. But is, in fact, true right now. India's inflation rate is hovering just above the 6-per cent mark, but the return on bank deposits (with a maturity of more than one year) is between 5.25 and 6 per cent. In other words, these deposits are actually charging depositors (instead of rewarding them) for keeping their money there. Real interest on them is negative.

So, should you rush downtown to save your money?

No. Not so fast anyway. This could very well be a blip in the chart. While falling interest rates excite more or less everybody, negative interest rates are understood to be bad news by policymakers, bankers, economic advisors and even politicians. It's bad for business when lenders develop a fear of lending.

So, will negative rates continue?

It is rather difficult to say at the present juncture, admittedly. But going by the signals sent by the RBI's governor, Bimal Jalan, no action is being contemplated that could endanger the 'low interest rate regime'. Over the last six years (starting 1997, when India's 'usorious' rates started getting bad press), the RBI has slashed the benchmark 'bank rate' by 600 basis points -- or 6 per cent.

Indian corporates have never had capital cheaper. Triple-A rated Indian companies, for example, can raise funds at an annual 4 per cent from overseas, and at 5.5 per cent from Indian banks. This is an extraordinary state of affairs, by all historical reckoning, but there is no sign that this is about to change anytime soon.

But what about inflation?

Here too, the last decade has seen a sharp decline. Inflation of almost 10 per cent was a common feature of economic life the 1970s, 1980s and even early 1990s. Since the mid-1990s, however, inflation has fallen sharply. In fact, in 2001 and 2002, the inflation rate was in the 3 per cent region - perhaps the lowest in the country's history.

Analysts see no reason to expect persistently high inflation again. Food stock supplies are adequate, business competition has reined in prices and India has escaped some of its supply bottlenecks in other areas that used to result in too much money chasing too few goods. The joker in the pack is, of course, crude oil prices. But then, India has made moves to moderate the effects of any such shock. After all, the government has a strong incentive to keep inflation low, given the prevailing voter sensitivity to the issue. High competition in the political arena is seen to be an effective antidote to hyperinflation anywhere in the world.

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