Page 46 - Banking Finance June 2020

ARTICLE

X Economists around the world believe that consumers X The Reserve Bank of India can absorb this shock by
initially would save more and spend less but there will printing fresh currency but up to a certain limit as that
come a point when they will realize that the real return will increase the expenditure and may aid in inflation
is negative and that’s when they will slowly start to reaching astronomical levels like in Zimbabwe &
consume as an alternative of holding on to low yielding Argentina.
cash. Also a noteworthy aspect is India’s demographical X The last time India faced a negative interest rate
dividend is far younger than that of some European &
scenario was in between July 2012 to January 2014
Asian economies hence the propensity to save would where in due to surge in oil prices the inflation had risen
be comparatively lesser. above 11 %. However that was more due to macro
factors and not imposed.
Against the Tide…

X In India the government bonds are the safest form of Around the same time, a snapshot of the economic scenario
investments hence with the negative interest rate in the country (Reference-https://www.livemint.com/
scenario, the yields on such instruments shall also fall Politics/burPSwwZ4JstNqkBGGWXCP/Economygrows-45-in-
and investors will begin to dump them. The Indian public fiscal-2013.html)
sector bank treasuries that earn handsomely during the
auctions will be devoid of such earning opportunities. It has been advocated by many economists that positive real
This shall have a spillover effect on the other asset classes interest rate is a must for emerging economies and India is
like pension funds. The chase for better returns might no exception. This is necessary for the expansion of the
force investors to look for riskier assets and render
adverse selection. The middle class is the largest portion
of the country’s population and have always been risk
averse. This is a deterrent! Furthermore India’s ageing
middle class population has huge affinity towards social
security which is in the form of investmentsand deposits
and any faintest depreciation in their savings might lead
to a colossal sovereign unrest.

X A noteworthy feature in the Indian Banking scenario is
that even if the interest rates were reduced to zero the
credit off-take will still be conservative. The reason
attributed to this is the poor quality of balance sheets
of the corporate and the partial capacity utilization of
the manufacturing sector.

X Due to the higher interest rate climate in India, it has
been an attractive destination for investors that
arbitrage on interest rate differentials. With the
negative interest rate scenario, even a falling rupee
would not be as lucrative an option.

X India has always been an importing country with more
than 66% of its imports directly linked to crude. With a
weakening rupee and fading economic activity, the
current account deficit will widen beyond any repair.
The sovereign debt will swell up manifolds and this shall
be further aggravated by decrease in collection of direct
and indirect taxes.

46 | 2020 | JUNE | BANKING FINANCE