Raghuram Rajan is an intelligent man and has a lot of integrity. He stays firm on what he says.
The whole of the industry, finance ministry, why even the PMO might want a interest rate reduction. I agree, we need to reduce interest rates. Let us take the case of a 60 year old man dependent on interest income alone. Currently i guess he gets a -3% real return on bank deposit. He earns about 7% post tax and the inflation applicable to him is about 10% (applicable inflation rate means include auto fare, eating out, clothes, gifts, medicines etc. nothing to do with WPI).
Do you realize that if he has only Rs. 50,00,000 and assuming he is spending about Rs. 300,000 he will exhaust his capital by his age of 72?
Which means if he lives till the age of 85…he will need about Rs. 1.25 crores…and obviously about 3 crores if he lives till the age of 95.
Now throw in a rate reduction…and make the -ve return to about 4%…i.e. the gap between the interest income to inflation gap..it means he will need a greater corpus.
From my experience of dealing with people, if interest rates go down, PEOPLE actually try to save more. The other thing that they do is to SPEND LESS. I am sure RR understands this. This is EXACTLY OPPOSITE of what Economics taught us. Behavioral finance is more important in Economics than pure economics.
RR knows what he is doing. And by holding interest rates at this level he is making sure that the senior citizen is protected.
IN a country where there is NOTHING that the government does for the Senior citizen at least protecting his REAL INTEREST is a huge necessity. Imagine if you had retired in the year 2000 in the US depending on interest income from CDs. You have been ‘s…d’ beyond shape.
Thank you RR. Some of us trust your judgement. Do what you think is right.
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