When interest rates are negative in real terms, savers are forced to hunt for yield, creating ideal conditions for asset-price bubbles. On Tuesday, April 17, Mr. Subbarao, Governor of the Reserve Bank of India, topped up India’s inflation tanks at a time when they were just beginning to approach a balance with the reality of India’s economy.
While most observers were expecting the RBI to lower interest rates by 25 bps, the Governor cut 50 bps off the price banks pay to borrow money – all the while protesting that inflation was not yet licked. WTF?
The very next day, the consumer price index for March (new series) came in, registering a 9.45% inflation, year-on-year. The policy announcement and the price data were rather poorly coordinated – or perhaps they were well-coordinated! In follow-up meetings to his credit policy review, Mr. Subbarao kept all options open regarding future moves in interest rates, making for a rather quixotic situation.
One of the more significant developments in banking over the last year has been the slowdown in bank deposits. Since you can’t fool all the people all the time, Indians are gradually realising that bank deposits are a bum deal when you lose buying power by lending your money to a bank. If you are a tax-payer, the real loss is significant. The percentage of household putting their savings into equity is small, and diminishing. Aside from the perennial favourite, gold, that leaves real estate.
In South Delhi, real estate prices have moved up 30% over the last year, making it one of the most over-heated property markets in the world today. The March consumer price index reflected this, showing that housing costs are up 14% year-on-year. This is a huge number; with Mr. Subbarao pushing real interest rates deeper into negative territory, it’s going to get worse. The real estate bubble is getting bigger.
Pop!
