The latest Reserve Bank of India decision to stagnate rates shows that semblance of reality has finally dawned. As prices are rising, economy is slowing down and savings are hit, the decision is partially correct. A saner decision would have been to increase rates. The central bank is responsible to depositors more than the borrowers. A long helping hand to borrowers since 2008 has hit the banks, people’s savings and despite wishes has not helped the economy and savers.
The RBI had been cutting the key interest rates at every Monetary Policy Committee (MPC) meeting since Shaktikanta Das took over as its Governor last December. In the five reductions so far this year, the interest rates have been reduced by a total of 135 basis points on concerns that growth momentum is slowing down and to boost liquidity in the economy. Sadly enough, liquidity has remained critical.
The country cites the west to justify most decisions that are not helping the people but does not take lessons from protests against atrocious bank charges in France, Germany, Europe, Australia and other countries. Such moves erupted in violent forms since 2015.
Anger of yellow vest rallies since December 2018 against bank charges forced French President E Macron to announce freeze on raising charges for 2019. But France is now erupting against pension reforms, grinding the country to a halt and closing Eiffel Tower to visitors on Thursday, December 5.
The RBI has not cited these as reasons for the decision to stick to October last decision of rate at 5.15 per cent as it sees prices rising further. It could not have overlooked the skyrocketing onion prices that touched Rs 150 a kg in Kolkata.
In practical terms, its October rate cut was improper and now it should have raised it instead of waiting till the presentation of the new Budget in February 2020. May be it did not do this due to the lobbies of powerful borrowers. The nation knows that such rampant borrowers have led to high Non-Performing Assets (NPAs) – simple huge losses to public sector banks – and the recent mergers of loss makers to save these entities.
Europeans are seething against the European Central Bank for the miseries in Europe. Pension funds post 2007 sub-prime collapsed in the US. Now people in France are fighting against such possible collapse.
India needs to learn. Its over decade-long love with the borrowers has hit the depositors of all ages hard, rather too hard. It is just not Vijay Mallya or Nirav Modi who have ruined the banks, there are hundreds of others. The banks while doling out freebies to the failing borrowers forget, they are mere custodian of millions of depositors’ savings and have no right to play with their hard earned savings.
The present slowdown is more due to the profligacy of the banking system, loss of people’s money, at least over Rs 12 lakh crore as officially stated. Window dressing of mergers avert an overt crisis but is definitely not a solution.
The HDFC Securities MD, Dhiraj Relli, says that RBI is worried about the rising inflation and GDP may not rise as domestic and external demand conditions have remained weak. Instead of rate cut, it nudged the government to cut interest rates on small savings.
The big question is –why should the rates for small savings be cut? A similar issue has hit the western nation leading to protests. Mostly these are because of G 20 suggestions. The protest in Europe against the troika – ECB, IMF and World Bank – needs to be taken seriously across the world. It needs to study if the banks are in proper hands or not. The unemployment in Eurozone remains at 11 per cent, growth is anaemic. Both Spain and Greece are in a poor state.
The RBI, despite many problems in the country, has largely stood as a protector of the banking system. But for its interventions, the situation could have been worse. Political cacophony to protect its autonomy must be taken as consensus to protect independent institutions.
The RBI decision has taken a break from the past one year as per its mandate. Its job is just not helping a gasping sector such as housing but protect the nation’s finances and economy. In brief, its job is promotion of saving and investment, controlling imports and exports, managing business cycles, regulation of aggregate demand, generation of employment, helping the infrastructure grow, allocating more credit for priority sector and managing and development of banking sector.
In short, hardly any aspect of economy is left out. But of late it has not considered the falling gross savings rate to the extent it should have. This speaks volumes. Any nation progresses on its savings. The best instances are the initial two decades after independence that ensured progress through collection of 25 paise coins and a minimum of five-rupee deposits. The rate has come down from 37.5 per cent on March 31, 2008 to 30.8 per cent on March 31, 2018 – fall of 6.7 per cent.
Shunning small investments, which still remains major source of development funding, is seen matching fall in overall growth. The links are visible but there are more invisible ones too.
The promotion of mutual funds and linkages to equity fund has seen more repatriation of profits by short term foreign portfolio investors. It may have occasionally zoomed stock indices but has not helped investors much. Mutual funds of many companies and banks have caused severe loss to the marginal investors. Overall the savings were swindled away.
The country also witnessed rise of ponzi schemes during the past about two decades. This was the period when banks in practice discouraged savings. The opportunity was lapped up by the untrustworthy ponzi firms.
The Economic Survey 2018-19, lays stress on savings than investment, saying that global studies have shown that though growth is associated with “a rapidly rising investment rate” it is associated with “even more steeply increasing savings rate”.
Former RBI Governor C Rangarajan says the fall in the household savings has been happening for a long time and has prompted him to describe the economic slowdown as a “structural” one, even though there are cyclical reasons for this too. Thus, both the RBI and the government need to look at this critical phenomenon. Campaign a la 1960 type is needed to restrain people from protesting, boost savings and stem the slowdown.