The government should cut the interest rate on saving certificates further to increase the flow of liquidity into the banking sector as bank deposits have bottomed out. This is what a report in a national daily on Wednesday said quoted an economist at a meeting in the city. He said the government last month slashed the deposit rate on its savings instruments by up to two percentage points to reduce its borrowing and allow bank deposit to beef up. But in his views it is not enough; the rate must be further lowered to help bank deposits to grow. He said depending on the types of savings instruments; the rate went down to 11-12 percent from 12-14 percent earlier when the weighted average interest rate on deposits at banks was 7.04 percent in April, down from 8.11 percent a year ago. He said in the prevailing situation people are more interested in buying savings certificates causing a collapse in bank deposits. He believes it may be reversed two ways – by raising interests on deposit to lure people to deposit money to banks. But it will not encourage private sector investment. So the other way is to further cut the interest on saving instruments so that people feel encouraged to making deposits in banks. When there will be more cash in banks, lending rates would automatically come down for investment.
As it appears that the money market is thus more controlled by the government instead of allowing it to function on the basis of its market strength. The government is the single biggest borrower and when it wants to use the saving instruments for the purpose, it raises interest rates to divert fund to bonds and securities away from banks. Again when it wants to use banks for the purpose, it forces banks to raise interest on deposits to indirectly encouraging people to channel deposits to the banks. As it appears the entire banking system has become tied to the borrowing and deficit financing of the government depriving the money market to grow on its own and keep stable.
Frequent change in bank rates is thus misleading the depositors from saving certificates to bank deposits and vice versa intermittently causing many of them to suffer loses. It is true that lending rates to business must come down to encourage short term and long-term investments; there is no alternative to it. But poor savers are always victims of such changes in absence of a functional pension scheme and comprehensive insurance scheme for them. There is hardly any viable scope for investment to live on income from such business other than income from saving. Stock market has ruined many in absence of a developed money market where swindlers have robbed their fortune and banks were instrumental to cause the run. What people want to see is that the money market must be allowed to work free from interventions and banks be allowed to function as corporate bodies based on their independent cost benefit calculations.
