NEGATIVE INTEREST RATES IN INDIA - A REVIVAL GAME?

The Buildup… The ongoing mayhem and panic created by coronavirus around the globe is well exhibited. Economies and businesses are shrinking by the day on account of lockdowns and retrenchment and people are waking up to uncertainty but with a hope to see light at the end of the tunnel.

- Siddharth Mahanty

India in the scheme of things isn’t isolated and thus, understandably affected. Our economy isn't in the best of shapes and a continued deceleration due to the outbreak of coronavirus may further push it into an abyss. Many economists believe that the world shall witness a global depression if the respective governments don't scramble at the earliest and put the pieces together. In a recent interview, the IMF Chief suggested that the situation is feared to be more severe than 2007-09 sub-prime crisis.

In the context of the battered Indian economy, the public sector banks play a pivotal role of forbearance. It is only through banks that the masses can be reached and the crisis can be arrested.

While we have heard of proposals to defer loan repayments and loan waivers in times of crisis, why cannot we move towards negative interest rates like Japan?

This may help us revive our economy and steer the country out of this mess. Can this be a heroic pull off? A reference point in turnaround management?

Let's first understand the meaning of negative interest rates. Consider you paying a fee for banks to hold on to your cash deposits and banks paying you a fee to opt for loans.

Seems weird! One would perhaps scratch his / her chin and make an attempt to comprehend it, which for many is an unfathomable concept! The underlying idea is to incentivize loaning & spending rather than saving and consuming.

The next logical question is why would banks do it?

In favor of the tide...

The time is most opportune for the banks to opt for negative interest rates because there could be an economic depression and deflation in the near foreseeable future. Now there could be an argument that negative interest rates and low inflation go hand in hand so how does India fit in?