{"id":35669,"date":"2018-11-01T11:19:25","date_gmt":"2018-11-01T05:49:25","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=35669"},"modified":"2018-11-01T11:19:25","modified_gmt":"2018-11-01T05:49:25","slug":"how-low-can-interest-rates-go","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/how-low-can-interest-rates-go\/","title":{"rendered":"How low can interest rates go?:\u00a0"},"content":{"rendered":"<p><a href=\"http:\/\/www.thehindu.com\/todays-paper\/tp-business\/how-low-can-interest-rates-go\/article19487988.ece\"><span style=\"font-weight: 400;\">How low can interest rates go?<\/span><\/a><span style=\"font-weight: 400;\">:\u00a0<\/span><\/p>\n<p><strong>Context:<\/strong><\/p>\n<p><span style=\"font-weight: 400;\">The interest rate on the one-year term deposit in India\u2019s largest bank has nosedived from 9% in July 2014 to 6.5% now. \u00a0Interest rates on the three-year term deposit have dropped from 8.75% to 6.25%.<\/span><\/p>\n<p><strong>Introduction:<\/strong><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">In pegging down their deposit rates, banks have taken their cues from the Reserve Bank of India.<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> \u00a0<\/span><span style=\"font-weight: 400;\">The RBI has pared its repo rate, the rate at which it lends overnight money to banks, from 8% three years ago to 6% now.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Bank deposit rates dropping by a steep 250 basis points in three year<\/span><\/li>\n<\/ul>\n<p><strong>Trends in Indian interest rates over the last few years:<\/strong><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">The repo rate, which hovered at 9% in April 2001 drifted down to 6% by March 2004, but reversed direction to recapture the 9% peak in July 2008<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The global credit crisis hitting India and recessionary trends in the economy, RBI was forced to effect a swift and brutal reduction in rates again from 2008.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">This time around, the repo rate dropped from 9% in July 2008 to 4.75% by April 2009<\/span><\/li>\n<li><span style=\"font-weight: 400;\">As growth limped back and inflation began rearing its head, the RBI embarked once again on a hiking spree, taking its rates from 4.75% in 2009 to 8% in 2012.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The year 2012-14 saw a sideways crawl in rates.<\/span><\/li>\n<\/ul>\n<p><strong>Recent step:<\/strong><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">With inflation moderating the economy going into slow motion, RBI pruned its repo rate again, from 8% in 2014 to 6% by August 2017<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> \u00a0\u00a0<\/span><span style=\"font-weight: 400;\">In its recent policy reviews, RBI has shown reluctance to hack away from further, issuing warning about inflation risks.<\/span><\/li>\n<\/ul>\n<p><strong>Reasons for drop in rates:<\/strong><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\"> \u00a0<\/span><span style=\"font-weight: 400;\">Rates have dipped below 6% only under extra-ordinary circumstances, such as the global credit crisis.<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> \u00a0<\/span><span style=\"font-weight: 400;\">India\u2019s central bank prefers to prioritise inflation targeting over growth.<\/span><\/li>\n<\/ul>\n<p><strong>Variables considered:<\/strong><\/p>\n<p><span style=\"font-weight: 400;\">The RBI considers other variables in its rate decisions:<\/span><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\"> \u00a0<\/span><span style=\"font-weight: 400;\">The need to maintain positive real interest rates for savers. RBI officials have indicated that for savers to prefers financial instruments, it is desirable to maintain a real interest rate of anywhere between 1.25% and 2% above inflation.<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> \u00a0<\/span><span style=\"font-weight: 400;\">The second variable that RBI considers is the inflation expectations of households for the future.<\/span><\/li>\n<\/ul>\n<p><strong>Present situation:<\/strong><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">Now, while recent inflation readings in India have been at the 2% mark, sustainable inflation rates are believed to be much higher.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">RBI\u2019s own projections expect inflation rates of 3.5%-4.5% for the second half of this fiscal.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Assuming a durable inflation rate of 4%, for savers to receive a 1.25%-2% real rates, policy rate need to be pegged at 5.25% to 6%.<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> \u00a0<\/span><span style=\"font-weight: 400;\">RBI\u2019s recent survey show that these expectations remain quite elevated despite the rock-bottom official inflation readings.<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> \u00a0<\/span><span style=\"font-weight: 400;\">In the latest June survey, households perceived current inflation rates to be 6.4% and expected inflation one year ahead to be at 8.6%.<\/span><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>How low can interest rates go?:\u00a0 Context: The interest rate on the one-year term deposit in India\u2019s largest bank has nosedived from 9% in July 2014 to 6.5% now. \u00a0Interest rates on the three-year term deposit have dropped from 8.75% to 6.25%. Introduction: In pegging down their deposit rates, banks have taken their cues from&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/how-low-can-interest-rates-go\/\">Continue reading <span class=\"screen-reader-text\">How low can interest rates go?:\u00a0<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[555],"tags":[],"class_list":["post-35669","post","type-post","status-publish","format-standard","hentry","category-test-1","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704856656},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/35669","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=35669"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/35669\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=35669"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=35669"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=35669"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}