Are you tracking the debate whether your Employee Provident Fund (EPF) accumulation will earn you 8.7 per cent or 8.8 per cent? Are you upset that the Finance Ministry has reduced the rate by 0.1 per cent from 8.8 per cent suggested by the Central Board of Trustees of the EPFO?
You can take solace from the fact that in many geographies, interest rates offered on deposits are miniscule. In fact, in Japan, where the Bank of Japan has decided to continue with its negative interest rate regime offering minus 0.1 per cent to banks parking money with it, bank deposit rates are at around 0.4 per cent. US banks offer deposit rates of around 1.5 per cent, while it stands around 2 per cent in Germany and United Kingdom.
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On the contrary, with the Reserve Bank of India’s repo and reverse repo rates ruling at 6.5 per cent and 6.75 per cent respectively, some banks in India offer 8 per cent plus interest on fixed deposits for tenure of a year.
So why do central banks go for negative interest rates, which sends signals for rock bottom interest rates? And it is not just the Bank of Japan that discourages banks parking money, the European Central Bank (ECB) also recently continued with its negative interest rate regime. The ECB’s deposit rate stands at minus 0.4 per cent, which in effect means charging banks for parking money with it.
We give you a lowdown on negative interest rates.
When do central banks resort to negative rates: It is not a common policy tool of central banks. Such a measure is announced when all other monetary measures have been tried to stimulate the economy but have failed and are at the risk of facing deflation. Japan and the Eurozone have been facing stagnant growth from some years.
What central banks hope to achieve: Negative interest rates are a signal to banks to lend money to business and retail consumers as it penalises lenders for holding funds. Central banks hope that the signals would push lending rates lower and increase offtake of loans and investments thereby stimulating the economy which are having growth problems. It is also expected that this would give a boost to consumption.
What impact does it have: As interest rates go lower and lower, it may deter banks customers from depositing money thereby squeezing the amount of money they have to lend and affecting profitability
How do banks react to negative rates: Lenders generally do not pass on rate reduction signals from negative rates to depositors on fears of deterring them and in the process of causing a dent in their lending operations. India, of course, is nowhere near facing such a scenario and Indian banks and their customers have little to worry.