In the entire debate about interest rates, no one seems to spare a thought for the savers who depend on interest income
04-Aug-2015 •Dhirendra Kumar
Over the last few weeks, the business of interest rate cuts and the independence of the Reserve Bank has received much public discussion. The triggers have been the RBI's firm anti-inflation stand, as well as the release of a report that recommends the dilution of the RBI Governor's power to set interest rates unilaterally.
Businessmen and government officials have railed against the RBI publicly and in private, pointing out that while consumer inflation is still troublesome, wholesale price inflation is sharply down, even in negative territory. Disappointingly, the entire public debate is so focussed on somehow making available cheaper money for government and businesses, that there is utterly no discussion of what interest rates mean for fixed income savers.
In terms of savings, India is a fixed income country, and the tens of crores of people have all their financial savings in FDs, PPF, post office deposits and such. The flow of money through the banking system basically amounts to these people lending to the government (by far the dominant borrower in the economy) and businesses. When CEOs, bureaucrats and politicians campaign for lower rates, it amounts to nothing more than taking money out of the pockets of savers and putting it into their own.
From the savers' perspective, talk of linking rates to wholesale inflation is nothing but robbery. Savers need a real rate of return at least two or three per cent higher than the consumer inflation. For huge number of retired people, interest is their only income. When you lower their rates from, say 9 per cent to 8 per cent, 11 per cent of their income is gone. At the same time if the consumer inflation is 7 per cent, then half their real returns are gone!
It's absolutely unconscionable that those campaigning for lower rates, and those in the media who write on the issue, never seem to give a thought to the savers who are funding them.