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NEGATIVE INTEREST RATES
What is Negative Interest Rates ?
Recently Bank of Japan announced Negative Interest Rate Regime. By this, it means that the Bank of Japan will charge interest to Commercial Banks @0.1% on some of their deposits kept with the Central Bank. In other words, it may mean that the Depositors will have to pay interest to Banks for safe keeping their money rather than they receiving interest on the money kept with the Banks.
The move might have been triggered since growth is not picking up in that country for long. And the Central Bank has taken this unusual step in the hope that this may instigate people to borrow from Banks ( due to very very low interest rates on borrowing ) and start purchasing. Thus, it will lead to recovery and growth. This may also be undertaken to drive away the “hot” money from the market.
This type of situation arises if there are no takers for the money being lent by the Banks. In other words, inflow of funds in the Banks is greater than the outflow of funds on account of Loans & Advances.
Effect of Negative Interest Rates
If there is negative interest rate regime in a country, there is no incentive to the depositors to keep their funds with the Banks in the form of deposits. Rather there is a penalty for keeping the deposits. Obviously, the depositors may like to withdraw funds from the Banks and keep it to themselves. However, this is not easy in practice as it may be risky to keep cash with oneself and the cost of safe keeping could be prohibitive. Alternatively, the Banks may not pass on the cost of interest charged by the Central Bank and bear the cost themselves.
The move may be expected to make Loans and Advances attractive for the borrowers.
The move by the BoJ had all the Stock Exchanges the world over going through the roof, more particularly in the developing countries as the move is expected to drive away the funds from Japan to developing countries like India where demand for funds is quite high and the interest rates quite attractive.
History of Negative Interest Rates
Apart from the Bank of Japan, even the European Central Bank had resorted to Negative Interest Rates in 2014. However, it does not seem to have made much impact on the economic recovery in European Union. Central Banks in Denmark, Sweden and Switzerland also are known to keep the Deposit Rates below zero for quite some time.
Indian Context.
This type of situation is unlikely in India where inflation is still quite high as compared to Europe and Japan. However, if the flow of funds is great, then it may help in softening the interest rates in India in the foreseeable future which would be good for Indian borrowers.
CA Gokul B. Rathi, Pune
M : 98500 41311
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