The Fed’s decision to keep interest rates unchanged is not an invitation for this country to cut its repo rates. In fact, the latter should increase its rates. This could be the beginning of a new economic phase
The sudden change in US decision against interest rate increases, apparently under pressure from US corporates, should not deter India from raising its rates. The volume of the two economies are different. The US has not taken a wise decision in putting off the interest rate increase. The US economy, as per the Federal Reserve, is gradually heating up. The present decision is a stop-gap measure. The Fed is likely to take a fresh view in December.
The Fed has kept its interest rates at almost zero per cent since the 2007-2008 recession. Despite the devaluation of the Chinese yuan and cheaper imports, the US economy has heated up to 1.2 per cent as there was an increase in employment and prices.
Having lived on a low interest regime since 2006, US corporates do not want to pay higher interest rates. And a lower interest rate will hurt the average US worker, whose savings are dwindling. The latest hope, almost after nine years, will again force US workers to lose their meagre savings. Still, having part-time jobs, the workers are facing a double whammy. They are paid less and the little savings they have fetch lower yields. The US move is likely to hit the average American’s pocket hard.
Though the US decision has cheered Indian stock markets, in reality, it is not a sign for good cheer. Reserve Bank of India Governor Raghuram Rajan almost simultaneously came down heavily on the Indian businesses for their jugaad tendencies —unprofessional short-cuts to reap profit. India has no reason to follow the Fed.
The RBI has a duty to protect its large number of average people and, in most cases, the poor savers. If India fails to increase interest rates, its economy is likely to be hit hard.
Stock market increases do not help the average investor who do not put their money in stocks. But when the common man is forced to invest in mutual funds and insurance, it puts him at a greater risk.
The US’s decision is likely to put other countries like India at a greater risk. A hike in the interest rates would have encouraged the people to spend less and save more. It would have put a check on US corporate profits and also kept the prices low. Now, higher expected prices are likely to heat up the world economy.
The Fed, as its chairperson talked in nuances at the Press conference, indicates that it still believes its appropriate to begin raising rates. The improved financial heath of households and banks, seven years after the crisis, mean that slightly higher rates should not cause too much pain.
The Indian rupee gaining on the US decision is seen as positive, but it can reverse as well. How long can India depend on the largesse of international powersIJ If the rupee continues its recent gains, it may change dimensions. That requires many policy changes including going slow on the so-called ‘reforms’.
The Government expects the economy to grow at over 7.5 per cent. On the domestic front, the Government is concerned about the less-than-desired growth in the manufacturing and industrial sector. The farm sector, owing to deficient rain, may have about 30 million tonne less yield. Finally, pressure from the well-organised corporate sector also prevents the Government from taking pragmatic steps.
The Government has to weigh its options. There is credit slowdown in the public sector banks, which are burdened with the non-performing assets. A seven-bank consortium in mid September recorded `7,500 crore loan to Kingfisher as losses. On the other hand, the private sector banks with minimum NPAs, posted higher credit growth, the RBI noted in its annual report. This is something that needs to be looked into.
Credit rates are at its lowest. less than a dozen large companies account for over 95 per cent of NPAs. Any cut in rates will benefit these companies largely. But it will be at the cost of the poor depositors, who have lost heavily as large houses pilfered their deposits and now earn less because of lower interest rates.
They have also to shell out more on taxes to fill up the Government coffers so that the Government can re-capitalise the banks. Domestic banks roughly require `240,000 crore by 2018 to maintain capital adequacy ratio — almost equal to the official three lakh crore rupees NPA. This year, the Government committed to infuse `25,000 crore.
The Government cannot be soft on the pilferers of public sector banks. There are groups which have not paid a dime back to the banks since 2008, says Credit Suisse. A part of the loans have also been reportedly written off. Actual NPAs would touch about five lakh crore rupees. Any cut in the interest rates without realising the loans from the largest borrowers can end up in a collapse of the banking industry and ruination of the Indian economy. A higher interest rate will ensure not only having higher savings but also flow of funds from various other economies.
It will pave way to inviting all those who can put money in India. Some change in rules for allowing South Asian countries to put money in term deposits can also be considered. It can create new economic brotherhood, apart from adding strength to the economy.