INTEREST RATES IN INDIA LIKELY TO RISE

Investors are becoming uncomfortable with the surge in money printing by central banks and that has also led to the ongoing rush of investments into digital cryptocurrency. The balance sheet of the US Federal Reserve has jumped from $4 trillion to around $7 trillion in 2020, a 75% growth in a single year, thereby expanding the supply of dollars at an unprecedented pace. The debasement of the US dollar has been a major source of support to gold prices. However, the returns on gold during the year have been far outstripped by the multi-fold rise in digital cryptocurrencies. Bitcoin, the most famous of the cryptocurrencies, rose 700% in 2020 and, over the course of the last 5 years, it has given returns of 85 times!

- V.P. Nandakumar

An important development for the Indian economy in recent years has been the remarkable success achieved in lowering interest rates. This came about because the RBI has steadily cut its key policy rate since January 2014 when the repo rate had peaked at 8 per cent. The repo rate has now come down to 4 per cent (the lowest ever) for a total reduction of 4 percentage points over six years. During the global financial crisis of 2008, the repo rate had bottomed out at 4.75 per cent before starting to rise again. Incidentally, the RBI had tried to raise rates briefly from June to August 2018, when it increased the repo rate from 6 to 6.5 percent. In fact, in the March 2018 issue of this publication, my article titled “Are interest rates poised for reversal?” about my expectations of interest rates heading up, proved correct in that the RBI increased the repo rate from 6 to 6.25 per cent in June 2018 and then to 6.5 per cent in August 2018. However, the IL&FS crisis hit the economy towards the end of 2018 and there were no further hikes.

The RBI’s move to cut interest rates over the last 3 to 4 years followed the decline in India’s inflation rate and reflected its confidence in the government’s ability to keep a lidon fiscal deficit.

During its February 2021 meeting, the RBI left its benchmark repurchase rate at 4 per cent stating that it would maintain an accommodative stance as long as necessary to support the economy hit by the COVID-19 crisis, while ensuring that inflation remains within the target going forward. The RBI revised its inflation forecast to 5 per cent from 5.2 per cent in H1 2021-22 and 4.3 per cent for Q3 2021-22. Meanwhile, the real GDP growth is projected at 10.5 per cent in 2021-22.