The World Is Going Crazy With Negative Interest Rates; So Grab That FD Now

If you are a saver and keen to lock into current interest rates, this is the time to do it.

If you are a borrower, waiting to take that large home loan, wait a while; or, better still, make sure you opt for adjustable rate loans. This is the time to switch from fixed to floating rates.

Reason: It is highly unlikely that the Reserve Bank of India (RBI) will hold on to its high rate structure any longer than the next monetary policy in April. So whether it is fixed deposits, debt funds, postal savings schemes, or tax-free bonds, this is the time to put a lot of your eggs in the fixed income instruments basket. While banks offer deposit rates that go upto 7.9-8 percent, long-term postal schemes offer rates in the range of 8.4-9.3 percent – the upper end being for special schemes for girl children and senior citizens. Tax-free bonds offer yields of 7.2 percent for 15-year tenures.

To be sure, this scenario has little to do with what is happening in the Indian economy and more with what’s going on elsewhere, though the budget announcement by Arun Jaitley, that he will be sticking to the fiscal consolidation path, cannot but have increased Governor Raghuram Rajan’s comfort levels with reducing rates.

So rush, for rates have nowhere to go but down.

The simple global reality is this: the world economy is in a deep ditch, and many large economies are moving not just to zero interest rates – that happened mostly in 2008 itself -  but even negative interest rates.

A negative interest rate means if you put money in a bank, when you take it out you will get less of it back. If you still want to save money, keep it under your pillow.

In January this year, the Bank of Japan (BoJ) announced its first dalliance with negative interest rates, and from February banks are to be charged 0.1 percent for additional deposits held with the BoJ. The idea is that if they have to lose money on idle deposits, they will try to lend more and revive the economy.

The European Central Bank (ECB) charges 0.3 percent for overnight deposits, and several other central banks – in Sweden, Denmark, Switzerland – have also moved to negative rates. Next in the queue may be Canada, Norway and the Czech Republic.

And, most stunning, US Fed Chairperson Janet Yellen told Congress that she was not against making rates negative, if warranted. Sitharam Gurumurthi, a former IMF official, notes in an article in BusinessLine that more than one-fifth of global GDP now emanates from countries with negative interest rates.

To be sure, this negative interest rate regime is currently impacting only banks with excess cash, and, to the best of our knowledge, no bank is actually asking a customer maintaining deposits with it to pay for these sums. When that happens, the economic world as we know it will be turned upside down.

While it is interesting to speculate on whether anyone will pay to keep money in the bank, obviously it can work for very large deposits, since you can’t store so much currency at home. You may well accept a charge for keeping money in the bank.

However, the broader point worth making is that in a world besotted by negative rates (which shows the bankruptcy of economic thinking rather than remedial action), it is unlikely that the US can hold its own and raise rates. If the US holds back further rate hikes and even considers negative rates, China and India cannot hold on to rates forever.

In a world gone crazy, where economists are hoping negative rates will push banks to lend more and raise economic activity and growth, there can be several implications.

First, countries like India cannot hold on to high rates since the currency will tend to appreciate, killing off exports forever. Exports have already been declining for a year and quarter now.

Second, borrowers will be wined and dined all over, and the climate will improve for borrowing in India, too.

Third, a further expansion of the negative interest rate area will set off currency wars, as countries try to protect whatever share of trade they currently hold.

Fourth, India could expect a flood of foreign currency flows, as it will be one of the few countries with robust positive rates.

Fifth, a falling rate regime should normally boost stocks, as existing corporate cash flows get rerated.

Sixth, negative rates will also encourage Indian corporate borrowers to switch from rupee debt to foreign currency debt, especially if they have a natural hedge in terms of foreign currency earnings.

Seventh, a sharply falling rate regime will come like a gust of fresh air for Indian banking, for nothing improves treasury profits like falling rates. Despite capital worries, the worst may be over for Indian banks, though there may still be a quarter or two of more bad loan disclosures.

For the Indian saver, the message is clear: lock into the current good interest rates before they trend down. Also take limited bets in stocks, as falling rates are correlated to rising stocks most of the time.

For the Indian borrower, the message is the opposite. Wait a bit, for things can only get better.