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Inflation is not the only worry

Author: Balaji Rao/Wednesday, June 20, 2018/Categories: Economy, Expert View

Inflation is not the only worry

“Hello Humpty, my father who is retiring later this month is in a fix.”

“Why, what happened?” Humpty asked Dumpty.

“The money he is going to have post retirement seems to be inadequate. He is worried that he may not be able to meet his daily expenses over the future years.”

“It looks like your father did not plan properly when he was in his prime earning years.”

“But he was investing regularly during his earning years. I wonder why the corpus he has seems inadequate.”

“I know the reason Dumpty. I have a strong feeling that your father ignored the future interest rate scenario some 20 years ago when he was investing for retirement and the likes.”

“But one accounts for future inflation only, Humpty. What’s this interest rate all about?”

“Don’t be naïve Dumpty. You know the prevailing fixed deposit rates, don’t you? It is hovering in the range of 6 per cent – 7 per cent and if you look at the historical fixed deposit rates, it was ruling in the range of 12 per cent to 14 per cent two decades ago. Your father must surely have calculated his retirement corpus based on the interest rates that prevailed then.”

“Oh yes, it has actually halved over these two decades. I think I get it now what you are trying to explain.”

“I am glad you understand. Look Dumpty, inflation is not the only villain in our lives, interest rates too can play spoilsport over long term.”

“But I wonder Humpty, why has the rates fallen over these years so drastically?”

“Search on Google for the deposit rates prevailing in developed countries such as USA, Singapore, New Zealand, Australia, Japan and so on you would realise that the rates are below 2 per cent p.a. which is not surprising. Over the last two decades India has progressed quite well and is one of the fastest growing economies. Isn’t it obvious that for development the price one has to pay is reduced deposit rates?”

“Can you explain a bit more? I am getting confused.”

 “It’s quite simple Dumpty; the progress of an economy is hidden in investments done by government and private entities in various businesses that create employment and also facilitates production of goods and services for consumption as can be seen from the GDP numbers of a country. To keep the borrowing rates low that encourages investments by entrepreneurs the deposit rates have to be sacrificed, isn’t it?”

“It means Humpty that interest rates are double-edged knife; if the lending rates have to be low the deposit rates have to be low too.”

“Of course, Dumpty, it is inevitable. Had your father realized this fact that as the economy progresses the deposit rates would reduce too perhaps he would have planned to have a larger retirement corpus than he is struggling with it today.”

“Yes, you are right. Young earners of today should have an eye on the future interest rates too while planning for their retirement kitty.”

“You are absolutely right, Dumpty.”

The author has written 6 books on investing and personal finance. He has 23 years of experience and 6 years in academics

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Balaji Rao
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