Why the economy needs a low interest rate regime
Interest rates on government savings schemes were slashed during the routine process of revision and reset last week, only to be rolled back. There were murmurs about how lowering rates hurts investors. But how we got here is a long story worth thinking about. In my early days of observing market data, I recall the long schedule of interest rates that the RBI published. Rates for term loans by the development finance institutions, for banks and loans under every category such as priority lending and export finance were specified. The money market meant the inter-bank call rate was fixed at 10%. The interest rate schedule was filled with double digit numbers, and one recalls a 22% rate and an inflation number of 19%. If someone told me that these numbers would be low single digits in my lifetime, I would have then been incredulous. Those were the mid 1980s when students of economics read reports of various committees that made policy recommendations. The Tandon and Chore committees on working capital directed how current assets and liabilities must be valued and how maximum permissible bank finance (MPBF) was to be arrived at.
Why the economy needs a low interest rate regime
Interest rates on government savings schemes were slashed during the routine process of revision and reset last week, only to be rolled back. There were murmurs about how lowering rates hurts investors. But how we got here is a long story worth thinking about. In my early days of observing market data, I recall the long schedule of interest rates that the RBI published. Rates for term loans by the development finance institutions, for banks and loans under every category such as priority lending and export finance were specified. The money market meant the inter-bank call rate was fixed at 10%. The interest rate schedule was filled with double digit numbers, and one recalls a 22% rate and an inflation number of 19%. If someone told me that these numbers would be low single digits in my lifetime, I would have then been incredulous. Those were the mid 1980s when students of economics read reports of various committees that made policy recommendations. The Tandon and Chore committees on working capital directed how current assets and liabilities must be valued and how maximum permissible bank finance (MPBF) was to be arrived at.