By Anjan Roy
In the context of the US presidential election, economists and political scientists are all wondering why the ground performance of the American economy is not boosting incumbent Joe Biden’s popularity.
US unemployment rate is at rock bottom levels, the economy is growing steadily, there is no trace of the much expected recession in the economy. Admittedly the prices have gone up sometimes sharply. But then, the wages have also been growing.
Despite these positive factors, Joe Biden is not getting the credit for managing the economy. On the contrary, he is being blamed for mismanagement, particularly as the prices have been rising. U.S. witnessed some of the fastest rises in prices in a bunch of years in the post war period.
Has this pre-election scenario in USA got some similarities with India which is now in the midst of Lok Sabha elections? Yes and No both.. Prime Minister Narendra Modi began his election campaign for third term with full confidence but after four phases of polling, his over confidence has been shaken. Three more phases of polling are due till June 1. Something has to be done in a hurry and so, the SBI announced the hike in deposit rates to bring some comfort to the millions of depositors who are also voters.SBI measure will be followed up by other banks. So there will be an overall hike in the entire banking sector.
As regards the U.S. economy, as it happens with the hyper active economists, some have banded together and sought an answer to the woes in economy. A quick survey has revealed that among other factors, the high prevailing interest rates are detracting from the image of a flourishing economy.
This is because the consumers are finding it hard to finance their mortgages. The American consumer sentiments are majorly influenced by the mortgage rates as most of the purchases are linked to mortgages. Be it house purchase or a car, the mortgage rate plays that critical role for consumers to decide whether to go ahead with a purchase or defer it.
The high policy rates of the US Federal Reserve, currently at 5%, is at historic peak. These rates have been raised in successive steps to tether the white hot US economy back to normal levels. Since the days of -zero-interest rates in the wake of the financial meltdown and Quantitative Easing, the US Federal Reserve is trying to adjust to more conventional monetary policy regime.
However, the high inflation rates had restricted the freedom of the central banker to adjust to normal levels. Inflation rate had hit exceptionally elevated levels, like 8% for the period of time. Thus the Federal Reserve was obliged to hike rates. The Fed chairman had often indicated at lowering rates but did not happen much.
On top, the economy was at a high level of activity, despite the prevailing interest rates. Some have described the course of American economy as “gravity defying”.
Coming to India, the interest rates have different connotations, The State Bank of India has just raised its short term deposit rates. Raising rates would automatically be reflected in the lending rates. With the short term deposit rates going up, the costs of funds for the bank should change. The marginal cost of funds would now rise and these would have to be squared up with the lending rates.
Industry and business would resent any interest rate hike. The Reserve Bank has also been seeking to lower policy rates to encourage economic activity. The SBI move may be viewed as contrarian.
But the policy debate apart, interest rate is viewed differently in India from, say, the western countries. In India, deposit rates have a larger and wider impact than the lending rates. A deposit rate hike helps the savers and this creates a sense of comfort.
Even now, a bank deposit is a major format for lodging your savings than otherwise. Particularly when there is little fall-back options in the absence of social security, individuals tend to keep away some money for the rainy day. For these ordinary savers, most often small savers, the bank deposit and post office savings schemes are the best alternatives even today.
Thus, the bank deposit rates have an income effect on the consumers as well as savers. A hike in deposit rate means a higher income for these people than a cost element for taking out fresh loans. This is connected to India’s social mores and thinking.
Excepting for the new breed of “double income no child families”, an Indian consumer will not readily go for a loan for fresh purchases. House purchase on mortgages is a new phenomenon and mostly confined to the urban areas.. Large consumer durables purchases on purely loan financing is also an emerging area.
Thus, rock bottom lending rates for encouraging economic activity, would be resented than welcomed by the people at large. An elevated level of bank deposit rates are thus generally welcomed by people, in opposition to the responses of business and industry and policy wonks.
The State Bank’s move to hike short term deposit rates in the midst of an election should endear the incumbent government to people at large. Admittedly, these also take time for transmission, as higher rates would get reflected over a lag. But these should certainly help popular sentiments than cloud it.
For the bank however it must have been a careful decision. At the instance of the owner the government of India, the SBI has raised the rate. It has no autonomy as the electoral bond episode showed. The bank has chosen to hike only the short term rates on fixed deposits. That can raise the marginal costs of funds for that short span of time. It can always re-calibrate the rate after that short term and arrive at a neutral position. This can be done some months after the elections are over.
These are very close and careful calculations for a bank, that too for a large bank like SBI which handles huge volumes of funds. But for the time being, the hike in short term deposits during the ongoing elections, is sure to bring some comfort level to millions of depositors . Three more phases of Lok Sabha elections are due. If this small hike in bank deposits gives a bit of comfort to the millions of depositors and they remember the benefit giver at the time of polling in the three next phases, that will be a cause for some comfort to the ruling party. (IPA Service)
