What is expected when someone deposits money in a bank? The answer is quite inevitable as the bank will provide quantum interest on the deposits. However, it is quite the reverse in negative interest rates. A negative interest rate means that the lender is paying money to the borrower or in other words instead of receiving interest on the money deposited in the bank, depositors have to pay regularly in order to keep the money in the bank.
Negative interest rates can be seen in the deflationary period when people or institutions are keen on hoarding the money rather than spending it. Hoarding more cash reduces demand for products and services and puts pressure on prices. Lower prices lead to reduced profits which in turn will lead to lower economic growth. Negative Interest rates exist when the Central bank of the country wishes to boost economic growth in the country.
Negative Interest rates were first applied by Central Bank of Sweden in July in 2009 when the bank decided to cut its overnight deposit rate to -0.25%. Even the European Central Bank followed this in June 2014 when it lowered its deposit rate to -0.1The Bank of Japan has also moved to -0.1% on January 29, 2016. Usually, those countries where the inflation rate is higher than the nominal interest rate are the ones typically requiring Negative interest rate policy. The other reason why interest rates are applied is to bank off the reserves. Not just until last week Jyske Bank was in the news by introducing 10 year home loan at a negative interest of 0.5 percent. The European Central Bank already charges its bank 0.3% and Sweden, Switzerland, and Denmark have negative interest rates.
Negative Interest rates also lower the borrowing cost. Apart from this that whenever a country’s bond yields negative returns there is low demand for them which in turn results in lower demand of the currency which can, in turn, lead to depreciation of the currency. This can make the country’s export more competitive and further enhance growth.
India’s macroeconomic environment very well differs from those of developed nations. Our country faces both inflation and economic growth. Inflation rates usually range between 3-4 % in India and are unlikely to fall down as low as developed nations. Eminent economists believe that
As per Gita Gopinath – Chief Economist of International Monetary Fund believes that the world economy is moving towards flushing more liquidity which will result in huge demand for safe assets in the world. She believes that there is no likeliness of a downward trajectory in the interest rate. As per Indian Economists, Indian growth may slow down but we may not see a recession and even in such circumstances we will have positive inflation. The nominal rate of interest below the inflation numbers will be a problem for India where people have limited investment options. It is too early for predicting the possibility of negative interest rates in India.
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