The Outlier Indian

A nation is facing a health crisis. Everyone, be it in government or private jobs, is hearing about salary cuts, worse layoffs. Self-employed, white-collar or blue-collar, have no idea when their next earnings will come through. Wherever one looks, only stories of anxiety and misery are to be seen and heard. The future is uncertain, to say the least.

What would be expected of a person/family in this situation? There are two options to choose from for a household. Spend or Save. I suspect that a sane individual, irrespective of background/occupation/class, will choose to cling on to their life savings. Rather than splurge around. What would be your response?

Reserve Bank of India’s answer is loud and clear. Come rain and hailstorm, people scurrying for their dear lives, whatever it is, a virus or a dinosaur – SPEND.

Coronavirus is not a financial crisis. We have been whacked by a once in a century pandemic that threatens to wipe out large swathes of the population. Indians are facing a health emergency of their lifetime. And, what does the RBI do? Cut the interest rate.

You see, the economy has to be supported. Just what kind of support is this? If people are assured of a return on their investments, they might be persuaded to loosen their purse strings. Even though I am not sure, who would indulge at this juncture?

With a brutal one-shot interest rate reduction of 0.75%, what is the message that the middle class and the lower class gets? There is no guarantee that their fixed deposits borne out of their life-time of savings will yield any meaningful proceeds. Their takings are only headed for one direction – down and taking out the bottom also along with.

And, RBI expects them to SPEND.

Interest Rate Cut for Central Schemes

The interest rate for the Senior Citizens Savings Scheme has been slashed to 7.4% from 8.6%. It is a 1.2% reduction. Elderly face a higher threat from coronavirus, Central Government has also picked up the cue.

The interest rate for National Savings Certificate has been cut to 6.8% from 7.9%. 1.1% reduction. Government of India is informing that the nation need not save, as such.

Term deposits of one to three years will now fetch an interest rate of 5.5% from the existing 6.9%, down 1.4%, according to a notification by the finance ministry. This is savage. In the Ganga of coronavirus, GoI is washing all its sins of the interest rate cut.

With so much of interest rate cut, what is the message to the Indian savers? You need not save. Just, spend. Spend your lifetime of savings. Go out, ENJOY the one life you have got and then, when your money is over, spend the remaining of your life in misery.

State Governments pay a premium, Savers get discounted

The borrowing costs for states have gone up by almost 1% in less than a month. The gap between the 10-year state government bond yields and the repo rate has doubled to 3.41% in the last one month. Meaning, state governments have to pay a premium, a higher interest rate to raise money and even then, there are no buyers for state bonds.

I strongly suspect that RBI is reducing interest rate deliberately so that the Government, state and central, can tap easy money from banks. It is a conspiracy to bail-out the broke governments by reducing their interest out-flow. Coronavirus came in handy for a one-shot demolition job.

Ideally, savers could form a co-operative society pooling their savings and buy state bonds at the higher interest rate they offer to market participants. Rather than keep getting short-changed by the banks, the puppets in the hands of RBI, continuing with their collaborative loot of the FD savers.

The Undue Haste For Interest Rate Cut

The emergency has just started. Nobody knows when it will get over. Nobody knows what would be the toll. And without caring to deliberate for the uncertain future and keep some gunpowder dry, RBI jumps into the hot water.

Now, RBI has no further elbow room, no matter how grave the catastrophe turns out to be. Well, US Fed reduced their rate to near zero, and our RBI has no one else to look up to. Imitation brooks no intelligence.

RBI could have waited to give relief to spenders on the interest rate front when coronavirus would have receded. No. Shaktikanta Das cannot wait. For his job is to only reduce interest rate under one pretext or the other to aid the government’s borrowing and make it cheap. He is a single KRA hit-man.

The Alternative Option

RBI reduced interest rates to encourage consumption. Request them to release the credit data of banks to see how much the off-take has swelled. It would be zilch, for personal as well as corporate borrowers.

Alternatively, we can request RBI to increase interest rates to make them at par with bond markets. Give a breather to FD savers and give them a belief that saving can co-exist with spending and ask them to spend. Corporate borrowing would still be zilch, but the effects of personal consumption on the Indian Economy will be there for everyone to see.

Just that, this can happen in a parallel universe. Not in the current version of India.