Vaagmi
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This may be of interest to many a retiree who is also a member here. Please read. But do not lose sleep. This too will come to pass.
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[TD="width: 589"]For the first time in India, the government has announced that it is formally giving the Reserve Bank an inflation target. Keeping the consumer inflation rate between 2% and 6% is the primary goal of monetary policy and RBI will owe the government (and the country) an explanation if it fails to do so. This implies that the Reserve Bank will have complete autonomy in setting interest rates as well as other levers of monetary economy.
It also implies that the central government will run a responsible fiscal policy. Otherwise the bank could just fail in its goal and pass the buck onto a government whose deficits are out of control.If this inflation target is continuously achieved over the next few years, it will be great news for the economy in general and for us individually. Prices that rise gently will be in the interest of everyone from businesses to individuals.
If the government and the RBI do succeed in enforcing this new low inflation regime, is there anyone who will be worse off, directly or indirectly? Surprisingly, the answer may be yes, at least in an indirect way.The one segment who are going to be uncomfortable in the low inflation regime are older people who are dependent on fixed income returns for making ends meet till retirement. The reason for this is that if the Reserve Bank is successful in holding the line on inflation, then interest rates in the economy will settle at a lower level. Interest paid on deposits of various kinds will likely to be barely 1% above the inflation rate.
Thus, real interest income (that is, interest income adjusted for inflation) that individuals can derive from deposits, is likely to be in this low range.This is great for businesses because their borrowings will be cheap, great for individuals who are buying houses, cars and other consumer goods on credit, and great for economic growth. However, for those who are past the earning stage of life, this is not so good. Lower interest income hits you with disproportionate severity if you are retired and dependent on it for expenses.
The arithmetic works in a way that is counterintuitively awful for those who are not in that situation. What looks like a small decline in interest rates, shows up as a huge cut in living income for those dependent upon it. I’d written about this earlier in the year when the interest rates on small savings had been cut. At the time, interest paid on the Senior Citizens Savings Scheme (SCSS) was cut 0.7%, which sounds like a modest drop. However, it means that earnings on an SCSS deposit were down 7.5%.An old person with the maximum allowed Rs 15 lakh SCSS deposit was earlier earning Rs 11,625 a month but earned only Rs 10,750 a month after the cut. This is a big hit. The presumably higher economic growth that will accompany a low interest regime are great for everyone else but will carry no benefit for older people dependent on interest income. They are no longer in the earning and accumulative phase of their lives–the booming economy does nothing for them. Not just that, the real inflation is inevitably higher than the official CPI rate.
The real solution is that equity investments must be part of the post-retirement kitty for everyone, something which needs a difficult cultural shift. That is the only way that higher economic growth can add to the well-being of retirees. For that, there must be a clear realisation that for people who are dependent on interest income, low inflation and high growth are not unalloyed good news. This is not a fringe problem — there are likely to be crores of Indians who are in this position. Worse, since the fixed-income retirement culture is intact, future retirees will be in the same situation. Is there a solution? Individuals who understand the problem can solve it for themselves, but a larger solution must come from the government.[/TD]
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The flip side of inflation target: Low inflation,
high growth not good news for retirees
Dhirendra Kumar
The Economic Times
Published on August 8, 2016
high growth not good news for retirees
Dhirendra Kumar
The Economic Times
Published on August 8, 2016
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[TD="width: 589"]For the first time in India, the government has announced that it is formally giving the Reserve Bank an inflation target. Keeping the consumer inflation rate between 2% and 6% is the primary goal of monetary policy and RBI will owe the government (and the country) an explanation if it fails to do so. This implies that the Reserve Bank will have complete autonomy in setting interest rates as well as other levers of monetary economy.
It also implies that the central government will run a responsible fiscal policy. Otherwise the bank could just fail in its goal and pass the buck onto a government whose deficits are out of control.If this inflation target is continuously achieved over the next few years, it will be great news for the economy in general and for us individually. Prices that rise gently will be in the interest of everyone from businesses to individuals.
If the government and the RBI do succeed in enforcing this new low inflation regime, is there anyone who will be worse off, directly or indirectly? Surprisingly, the answer may be yes, at least in an indirect way.The one segment who are going to be uncomfortable in the low inflation regime are older people who are dependent on fixed income returns for making ends meet till retirement. The reason for this is that if the Reserve Bank is successful in holding the line on inflation, then interest rates in the economy will settle at a lower level. Interest paid on deposits of various kinds will likely to be barely 1% above the inflation rate.
Thus, real interest income (that is, interest income adjusted for inflation) that individuals can derive from deposits, is likely to be in this low range.This is great for businesses because their borrowings will be cheap, great for individuals who are buying houses, cars and other consumer goods on credit, and great for economic growth. However, for those who are past the earning stage of life, this is not so good. Lower interest income hits you with disproportionate severity if you are retired and dependent on it for expenses.
The arithmetic works in a way that is counterintuitively awful for those who are not in that situation. What looks like a small decline in interest rates, shows up as a huge cut in living income for those dependent upon it. I’d written about this earlier in the year when the interest rates on small savings had been cut. At the time, interest paid on the Senior Citizens Savings Scheme (SCSS) was cut 0.7%, which sounds like a modest drop. However, it means that earnings on an SCSS deposit were down 7.5%.An old person with the maximum allowed Rs 15 lakh SCSS deposit was earlier earning Rs 11,625 a month but earned only Rs 10,750 a month after the cut. This is a big hit. The presumably higher economic growth that will accompany a low interest regime are great for everyone else but will carry no benefit for older people dependent on interest income. They are no longer in the earning and accumulative phase of their lives–the booming economy does nothing for them. Not just that, the real inflation is inevitably higher than the official CPI rate.
The real solution is that equity investments must be part of the post-retirement kitty for everyone, something which needs a difficult cultural shift. That is the only way that higher economic growth can add to the well-being of retirees. For that, there must be a clear realisation that for people who are dependent on interest income, low inflation and high growth are not unalloyed good news. This is not a fringe problem — there are likely to be crores of Indians who are in this position. Worse, since the fixed-income retirement culture is intact, future retirees will be in the same situation. Is there a solution? Individuals who understand the problem can solve it for themselves, but a larger solution must come from the government.[/TD]
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