Interest Rates on Deposits

There was deceleration in the economic growth during 2008 and 2009. Among the measures the government and Reserve Bank of India (RBI) took, one was decreasing the interest rates for loans as well as deposits. While one can understand the eagerness of the govt and RBI to accelerate growth rate, it is difficult to accept the reduction in interest rates on deposits as it amounts to asking the depositors to bear the burden of reviving economic growth. Reduction of Interest rates on loans will encourage higher consumption leading to higher production. Banks will suffer loss, if they were made to lower interest rates on loans but maintain interest rates on deposits. Wherever, the banks are made to lend at lower rates, the government should meet the loss arising from lowering interest rates and should not ask banks to meet the expenditure by reducing interest rates on deposits. Interest rates on deposits have come down from around 10% per annum to around 6% per annum while interest rates on house financing, vehicle financing, industry have come down from around12% to around 8%. While concluding agreements for Build Operate and Transfer projects and Power Purchase Agreements, government agrees on return on capital of 10-15%. Wages are increasing by 10-15% every year. In the unorganized sector, the increase is higher. Prices of consumer items also increase by more than 10- 15%. Gold price has increased by 100% in the last three years i.e. at 30% per year. Share market has seen increase in index,. If interest rates on deposits are not kept at a reasonable level, say 10-15%, depositors will withdraw their money for investment in gold, real estate etc and the banks would starve of money for lending to automobile purchase, housing sector and trade and business activities. Why should the depositors invest in deposits and get lower return when they can get higher returns in investing in gold, real estate etc.?

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