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Saver’s Get Their Revenge

At long last, there’s some hope that savers will start getting decent returns...

Late last year, I had written in these pages that the Reserve Bank’s stance on interest rates had led to a noisy growth-vs-inflation debate, but no one seemed to be paying any attention to the well-being of fixed-income savers. Interest rates have been far lower than is justifiable by the inflation rate that consumers have to contend with. For the vast majority of Indians who rely on deposits of some kind for earning returns on their savings, real earnings have been negative.

However, because our central bank, for some reason, seems to pay attention only to wholesale price inflation; and because government and industry has been shrilly demanding lower rates, savers loss has been ignored. Well, the chickens may have come home to roost now. The inherent contradictions in the way the government has run the economy and the RBI has run the interest rate regime have come to their logical conclusion. The blundering actions that the Reserve Bank has taken in its gallant defense of the rupee have meant that interest rates are hardening. It won’t be long before deposit rates to go up and savers start getting a decent penny for deposits. Small savings rates will be the last to follow but even they have a market linkage now. While fixed-income mutual funds may have suffered losses in the immediate aftermath of the RBI’s actions, they too will start generating higher returns than they were.

It’s true that the official story is that what is being done is not an increase in interest rates but only a squeeze on liquidity, but one will follow the other inevitably. Of course, the bank as well as everyone from the Prime Minister downwards have expended a lot of breath insisting that these measures are temporary and will be reversed when the rupee stabilises. However, this statement is meaningless unless ‘temporary’ and ‘stabilises’ are defined. Any sensible person can see that the decline of the rupee is as temporary as the vast current account deficit, which itself is as temporary as a wide variety of underlying problems. It could all get fixed any decade now.

Anyhow, my agenda here is to highlight the issue of returns that savers get. The Indian savers’ propensity for non-financial savings is often criticised and encouraging financial savings is now said to be a priority. Certainly, it’s one of the prime motives behind the ‘inclusion’ agenda that’s supposed to be a major factor in choosing who gets to open new banks. However, it’s hard not to see all this as just a way to get cheap money for the government. Ostensibly, what drives the Finance Ministry’s open campaign for low rates is that it will be good for growth. However, it’s actually more like a customer trying to beat down a supplier’s prices.

Forget about growth-vs-inflation for the moment and look at the first effect of low interest rates. It will be lower returns for depositors and lower cost for borrowers. The biggest borrower in the country is the Government of India of course. And the biggest lender--directly and indirectly--are the people of India. A large proportion of India’s financial system consists of the government borrowing from the people. Obviously, it wants to pay less. This desire of the government to pay less is generally sold as being good for the fiscal deficit. That it may be, but a combination of high consumer inflation and low rates--which is effectively what we have had for some time--inflicts compounding damage to the financial condition of fixed-income savers. That’s also a category into which many Indian retirees fall.

However, as I said earlier, this may not be sustainable any longer. The interplay between the exchange rate, inflation and interest rates is likely to result in better returns for savers. The talking heads will tell you that higher rates are bad for the economy, but nowadays there’s so much that’s bad for our economy that you might as well at least get a decent rate from your bank.