Wednesday, June 23, 2010

Low Interest Regime - Pensioners' Dilemma, Industries' Bonanza

If the interests of any two groups are diametrically opposite, then they are Pensioners ( Retired people) and Industries.
The industries and the Business want lower lending interests from the banks. When they borrow at higher interests, their cost of production goes up. The demand as an inverse function of the price of products goes down. The Businesses make lower turnover and lower profits. So, whatever be the rate of inflation, the business lobbies with the Govt. and the Reserve Bank of India to retain the lower interest regime. In these days when every one watches the GDP rate , the Govt. certainly does not want the rate of growth to slip and get the blame for slowing down the economy. If inflation climbs up , the Govt. thinks that the growth in economy will put more money in the hands of the people and silence cries of protest on inflation. Well, to some extent, the Govt. is right. With pay-packets constantly on the rise, the public in the age group 25-60 is not as worried about inflation as used to be the case a decade or two ago.
But there is one group which is eyeing the double-digit inflation with tremors and low interest regime with annoyance. It is the pensioners. Those people whose survival depends on the pension they receive or the returns they get on their investments. This group gets hit on both the fronts. High inflation reduces the value and purchasing power of the money they have. Besides, the low interests offered by the banks on the deposits ( which depend on the RBI monetary policies) put less money in the hands of these people who do not earn a salary income any more. Many pensioners think and rightly so, that they can fight inflation through judicious expenditure of money and wise choice of goods to be bought. But they are helpless when the interest income on bank deposits keeps decreasing as keeping the cost of money low enough to benefit the industries becomes the guiding mantra of the Govt. This dilemma of the pensioners has no chance of a happy resolution since numerically the pensioners are a small minority in a country where the majority of the population is under 40.

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