Commercial banks should hike interest rate proportionately for the depositors

High rate of inflation, at least above 6 per cent, is likely to continue for the rest of the year, according to the RBI. And to fight it, the central bank has hiked the repo rate, i.e. the rate of interest at which the central bank lends money to the commercial banks in case they need funds, for the second time. It is done, all over the world, to contain inflation. This higher rate of interest acts as a disincentive for the commercial banks to borrow from the central bank.

In the same way, when the repo rate is hiked, the banks demand higher interest rate from the borrowers. In effect, it contains the quantum of borrowing, thereby containing the supply of money, thus giving shape to the RBI’s intention behind raising repo rate.

But, an increase in repo rate cannot be an instrument of unfair profit making for the banks, and if it pays higher interest rate to RBI for seeking loan or charge higher interest rate from the borrowers, it is bound to pay higher interest to the depositors who have technically loaned their money to the banks.

For almost fifty years after independence, India suffered from mixed economy and socialistic mentality. In an overall perspective, it jeopardized the country’s growth severely. In government sectors like banking, it created a feudal mentality among the workers and management alike. The depositors were treated as inferior beings, hapless people dependent on the mercy of the employees and management. The same attitude cannot continue now, three decades after liberalization of the economy.

Simply put, the banks can neither deny the depositors their rightful interest rate, nor can evade social responsibilities that make capitalism more acceptable to the common man. The depositors must get the same extra interest rate that the banks will have to pay to the RBI if they need more cash flow. Again, as higher rate of interest will attract more deposit, it will help to contain inflation and will also make the banks further cash-rich.

In fact the investment opportunities are open to all, and cash can be utilized by everyone in different channels. The share market is a little volatile now as further repo rate hike is presumed in light of inflation rate hovering over 7 per cent till September. Further selling pressure from the foreign investors and rising crude oil price in the international market (above 120 dollars per barrel is also dampening the spirit..

Under the circumstances, the RBI must pressurize the banks to increase interest rate on FDIs, The banks may argue that as the demand for borrowing is low, they do not need to attract more deposit by offering higher interest rate.

But, no business entity is entitled to have it both ways, like both from buying and selling. As the producers are bound to reduce price of their products if the input cost goes down, so the banks are bound to give higher interest rate to the depositors if they charge more interest for loans they forward.

Again the RBI has also increased reverse repo rate that stood for a long time to 4 per cent to 4.4 per cent. So the banks can perk some of its deposit with the RBI, and can earn some extra interest from it. All together, there is no reason why the banks will not pass on the benefit to the depositors.

However, the banks have so far not done it. Assuming the repo rate will increase further, and the increase will cross one percent threshold, the banks should also increase interest on FDI by at least .75 per cent. It will help the middle class and the poor, particularly those dependent on interest earning (like the senior citizens), and it is the social responsibility of the system in this time of rising inflation. The RBI cannot allow the commercial banks to shirk this responsibility.

It has always been assumed in economic theories that from interest charged by commercial banks on loans to the returns from deposits, various financial and investment instruments are indirectly dependent on the repo rate. But now in India a lot of things are happening that cannot be explained in economic terms, giving birth to the suspicion that through the fissures of gaining more control of everything the socialistic tendencies are raising its head once again. It will harm both the democratic polity and the economy.

We can hope the RBI, which misread the inflation situation for more than a year, will not play games anymore and will come to the aid of common man, in this case the common depositors. – INDIA NEWS STREAM

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