Monday, August 3, 2015

Bringing Down Interest Rates- A Parallax View

Interest rates are also a function of 'expectations'.  Our base is set by the savings bank interest rates. As we keep going higher along the risk curve, we demand higher and higher interest rates.

Every developed nation has a 'low' interest rate regime. India has a 4% to 14% interest regime. This is exceedingly high. So, let us bring down expectations. That can be done in the following ways:

i) Make savings bank interest as ZERO. SB accounts are the base level from which interest rate expectations flow. Once this is zero, our expectations come down;
ii) Ban all non banks from accepting public deposits. We are probably the only country that allows companies, known and unknown, to take public money as 'deposits' , 'NCD' etc.  This should be brought to a halt. So this plugs the second biggest avenue for retail money to earn anything and brings down the 'expectations';

This will drive people to mutual funds. And since savings money will be happy with even a couple of percentage points for short term money, we can bring down the short term borrowing rates through Commercial Paper etc. Government can issue Treasury Bills at lower rates.

We can have a cascading effect on interest rates. I know it sounds very simplistic, but I am sure will result in a lower interest rate structure.

No comments: