those deposits back out the door again as loans. Which is just what we did see. We are also seeing this happen today as both SBT and IDBI cut their lending rates. In fact, as people were saying one week into the demonetisation campaign, this was going to lower interest rates . That flood of cash couldn't really do anything else in fact. The importance to us of all of this is as above. This is a general increase in the efficiency of the Indian economy. Money, rather than being left under the bed, is now in the banking system, where it can and will be lent out. And that there is more such means that the interest rates which are charged fall. Thus we would expect this to boost economic growth. Do note that this does not mean that demonetisation is perfect, nor even that it was the right decision. In my opinion, balancing the pros and cons, it's a good idea. But then as we all know opinions are like fundament, everyone got one. But this specific effect of demonetisation is what economists call a Pareto Improvement. We've made the economy more efficient, we've made some (in fact, over time, all) better off without having to make anyone worse off. Purely by getting slow circulating cash into the banking system where it can be lent out. 11
5 reasons why demonetization affects interest rates On 8th November, the government made a shock announcement—500 and 1,000-rupee notes would be demonetized to curb black money, counterfeiting and fight terrorism. The move resulted in about 85% of the total value of currency being taken off from circulation. It is also likely to have short and long-term effects on the economy. One reason for this is the impact on interest rates. Here are five reasons why demonetization affects interest rates. ● High deposits in the banking system Banks have witnessed a gigantic increase in deposits. This is mainly because of the short deadline for depositing high-value currency notes. Around Rs 5.5 lakh crore has already been deposited in banks till November 18, as per government data. This resulted in high liquidity in banks. In comparison, currency worth Rs 1.03lac crores has been issued till November 18. ● Deposit rates slashed With an abundant increase in deposits, deposit rates get slashed. This shouldn’t come as a big surprise to customers—it’s simple demand-supply economics. As the supply (deposits) increase, prices (deposit rate) fall. And that’s what has happened. Most banks have announced a cut. ICICI Bank and HDFC Bank cut deposit rates by as much as 0.25%. This cut is likely to continue too. “All rates will fall,” said SBI Chairman, Arundhati Bhattacharya in a recent report, indicating that deposit rates, as well as lending rates, could decrease further. ● Attractive borrowing rates Yes, the demonetization caused deposit rates to dip, but there is still some good news for customers.
You've reached the end of your free preview.
Want to read all 25 pages?