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Unintended Consequences of Wrong Economics

Non-market interest rate on National Savings Certificate (NSCs) is becoming a threat to all the other interest rates in banking sector. There are three repercussions that have come to surface with this: 

  • NSC's have soaked up a huge share of nation's deposit. This could fuel up liquidity crisis in banks.
  • Commercial banks are obliged to raise their deposit rates to attract more deposits.
  • Increasing deposit rates have further pushed the lending rates to increase. This has made the investment more expensive.

This can easily lower the future growth prospects. In 2015, BB governor justified the high rates of NSC arguing that the non-market NSC rates did not disturb the normal growth of the capital market. The argument is redundant because no one would go the capital market if the risk-free NSC rates is higher than the stock market. People would go for NSC because it is completely risk free. This is the exact reason why we see an upward jump in the stock market index as soon as there is a cut in the risk free rate by the central bank. The low growth rate of stock market can be highly attributable to NSC rates. The liquidity crisis going on and can also be attributed to non-bank NSC rates. If NSC rates are not rationalised, the account imbalances will be aggravated. And one bad policy will drive the fruits of other good policies away.

 By: Neha Maheshwari


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